Schroders has designed a new investment tool to evaluate how well companies manage their human capital – and the effect this can have on future returns for investors.
As part of Schroders wider approach to sustainable and ESG investment, this new framework will use quantitative accounting metrics, alongside qualitative techniques to enable investors to refine their understanding of human capital management’s contribution to a firm’s returns and productivity.
These tools have been created with academic support from Saïd Business School, University of Oxford and California Public Employees’ Retirement System (CalPERS). Schroders says this research confirms human capital is a clear driver of company productivity and profitability, and that companies with durable management frameworks create stronger returns and value for investors.
Schroders head of sustainable research Angus Bauer says: “This research tells us that investors cannot ignore human capital management in evaluating investee companies.
“As we approach continued economic volatility, our analysis shows that companies with strong human capital management are likely to be more capable of navigating the future effectively. Even as the integration of artificial intelligence across industries evolves, the relevance of people as the stewards of value creation will remain high.”
Schroders head of European blend Nicholette MacDonald Brown adds:“Unlike environmental factors which have transparent values, human capital has traditionally been difficult to quantify, especially when looking at the lower end of market cap where data is extremely opaque.
“This framework allows active managers like us to gain greater insights into companies within our investment universe. We can identify those which are leaders and laggards in human capital management to make informed allocation and engagement decisions.”
Top-line findings from the research include:
- It is possible to define and measure what the outcomes of good human capital management look like, and why there are structural and cyclical reasons to focus on this
- Human capital returns are positively correlated with forward excess returns (those exceeding a relevant benchmark or index) over multiple time horizons and across a majority of sectors, even after controlling for Return on Capital Employed and adjusting for a variety of factors
- There are multiple paths to human capital management affecting balance sheets and profit and loss.
- There are risks associated with focusing too much on an objective measure for human capital. Human capital analysis must combine qualitative and quantitative assessment.
