How good human capital management creates competitive advantage

The COVID-19 pandemic brought about new perspectives on the future of work and workplace best practices such as remote or flexible working hours. Initiatives with significant corporate support such as the World Wellbeing Movement have increasingly pushed to establish people wellbeing as a key performance indicator.

For decades, regulators have asked companies to report metrics related to human resources. But since the early 2000s, investors, management teams, employees and regulators have grown more interested in human capital, a term that recognizes the workforce as a major component of a company’s value and a key factor in creating competitive advantage. Human capital is a key intangible asset (IA) — defined in financial accounting standards as “an identifiable non-monetary asset without physical substance”— and accounting expectations have evolved to consider resources dedicated to human capital not only as expenses but also as critical investments. In its work on sustainability-related financial disclosures, the International Sustainability Standards Board is considering human capital as a priority project, addressing employee wellbeing, diversity and inclusion and workforce investment, among other topics.

Since the early 2000s, there has also been clear evidence that the market is placing greater significance on intangible assets, from intellectual property to brand power to internal and external relationships to corporate culture and tacit knowledge. This shift is signaled by the widening gap between the book value and market value of companies — a difference that is generally considered the measure of a company’s intangible assets.

To better understand the relationship between IAs and human capital management, in this analysis we calculate the IA intensity of companies in the 22 industry groups assessed in the 2022 S&P Global Corporate Sustainability Assessment (CSA) and focus on the eight industry groups with high IA intensity. Revenue generation in these industry groups especially benefits from innovating new products and bringing them to market — activities that rely on human capital. Using S&P Global ESG Scores raw data, which is based on the CSA, we explore whether these industry groups with high IA intensity appear to make talent management a priority.