In September 2019, the SASB Standards Board approved the Human Capital Management Project as its first standards updating project – a recognition that this is a priority issue for investors and companies. According to SASB, the purpose of this project is to “assess the scope and prevalence of various human capital management themes across SASB’s sectors and within its 77 industries to develop a solid evidence-based view on this cross-cutting theme.” As a first step, SASB undertook a literature review and consultation process to produce a Preliminary Framework, which was published for stakeholder feedback in December 2020. The Framework, when finalized, will serve as the basis for metrics development.

In a comment letter to SASB, signed by the members of the Expert Group and endorsed by their institutions, the authors express support for the Preliminary Framework’s broadened conception of the workforce to include workers in supply chains and “alternative workforce.” They also offer recommendations for the finalized Framework so that it provides the strongest possible foundation for the human capital standard setting process, and suggest four priority standard setting projects across the SASB standards:

  1. Addition of metrics related to high-risk labor practices;
  2. Extension of disclosures related to collective bargaining across industries and into supply chains;
  3. Attention to gender and race throughout human capital metrics;
  4. Development of indicators that assess the extent and quality of human rights due diligence.

Below is an excerpt from the letter. Read the full statement here.

The Preliminary Framework opens the aperture of SASB’s human capital management standard setting to the challenges of today’s global economy. It acknowledges that the increasing cost of compliance and of capital arising from poor practices are growing for all firms, and clarifies that labor practices can engender not just regulatory and reputational risk, but also financial and operational risk. The Framework also identifies two critically important new human capital themes: “Labor Conditions in Supply Chains” and “Alternative Workforce.” Further, it makes important connections between basic benefits (e.g., paid sick leave) and mental health, employee performance, growing inequality, and human rights. In defining trends, such as automation and contingent labor, which create conditions of worker precarity and labor harms, the Preliminary Framework indicates that SASB considers related risks as financially material and a necessary basis for the development of effective reporting standards for long-term value creation. We agree, and below we point to additional disclosure topics and metrics that can provide investors with more accurate information on industry-specific risks…

There are certain core characteristics of human capital management, including worker well-being, fair and equitable pay, worker engagement, etc., that apply to all workers regardless of where they are situated, be it in headquarters or within supply chains. We therefore strongly endorse the proposed human capital management themes, in particular “Labor Conditions in Supply Chains” and “Alternative Workforce,” because their inclusion rightly broadens the scope of the workforce to reflect today’s business structures, and paves the way for standard setting that can better capture human capital management risks.

There are further reasons why the Preliminary Framework’s recognition of labor conditions in supply chains as a material human capital management issue makes sense. From an investor perspective, understanding how workers are treated within a company’s supply chain and in its alternative workforce is critical to understanding the whole company. Companies themselves acknowledge that they have power over how workers in their supply chains are treated (see here and here), and may be held jointly liable for supply chain practices or face regulatory changes extending their liability. Moreover, inclusion of supply chain labor practices as part of its human capital management standards will bring SASB in step with new and emerging law in Europe and elsewhere on mandatory human rights due diligence, as well as international standards, such as the International Labour Organization’s (ILO) core labor standards, the UN Guiding Principles on Business and Human Rights, the OECD Guidelines on Multinational Enterprises, and the EU Action Plan on human rights and decent work in global supply chains.

We have two suggestions for improvements to the characterization of the themes, which if adopted, can better ensure that the finalized Framework provides the strongest possible foundation for the standard setting process.

First, the category headings elide the fact that the Preliminary Framework’s six themes implicate fundamental rights, as enshrined in the ILO core labor standards, and as such focus on lagging indicators rather than leading indicators. For example, the denial of rights is the cause of “worker stress,” which the Framework rightly identifies as a corporate risk; therefore, achieving “worker wellness” depends on upholding rights. By focusing on the protection of rights rather than generalized impacts of the failure to do so, the Framework will be more likely to yield leading indicators, which are far more valuable to investors. Moreover, the discussion on the role of “organizational culture” in Diversity and Inclusion is missing the concept of “equity” as a fundamental right and a necessary core value to achieve a company’s diversity targets, not just a matter of “culture.” Finally, the theme “Labor Conditions in the Supply Chain” does not fully capture the risks of labor exploitation in high-risk contexts, such as withholding of documents, inadequate wages that may be withheld or delayed, excessive working hours, and the denial of the fundamental right to freedom of association and collective bargaining.

Second, the Preliminary Framework points mainly to a company’s exposure to regulatory and reputational risk as the basis for consideration of supply chain risks in the SASB standards, and underplays operational risk. Poor management of supply chains is also an operational risk, and can be more strongly acknowledged as such within the Framework so that the disclosure standards can be strengthened (see the multiple dimensions of corporate risk here). Operational risk for global manufacturers came into sharp relief last year as thousands of factories had to close because of orders being canceled or postponed without notice, leading to long-term damage in the supply chain. In short, there is abundant evidence that supply chain resilience depends upon good labor practices in supply chain management.

Read the full statement here.

 

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