Human capital growth through social impact investment

Economic Times, April 18, 2022

By Pradeep S Mehta and Tanya Goyal,

Human capital along with other intangible assets, on an average, is estimated to comprise more than half of the market value of a company. A thoughtful human capital management practice or absence of it in a competitive employment landscape could have a visible effect on a company’s financial health. Investors now more than ever are making such capital management practices their investment priority.

Further, productivity of workers is directly proportionate to their well-being. The capacity of such human capital includes economic and social well-being as a major driving factor in the growth of an enterprise and economy as a whole. Thus, it becomes imperative for a firm to focus on its human capital and explore ways to ensure the welfare in all forms.

Human Capital is a measure of the education, capacity, skill, and attributes of a worker and has the potential to influence the productivity capacity of a worker. The skills provide for a knowledgeable workforce that provides for economic value and increased productivity. Thus, the quality of work could be increased by investing in workers and their skill sets. Most importantly, there needs to be a shift in how Human Capital is valued.

Unemployment and workers’ welfare

Worker’s welfare should not be considered a cost burden but an investment for human capital formation. The inequality between the employed, unemployed and unemployable workforce is not just in wages but also in skills and opportunities and this is largely reflected in the huge unemployment that our society is facing. Most of this is in our youth thus many commentators are speaking of a demographic disaster rather than dividend.

During a survey in Jaipur, under our project GrowJobs-II supported by Ford Foundation, many of our enterprise interviewees showed concern of large unemployment which could lead to more social upheavals.

Data from the Centre for Monitoring Indian Economy (CMIE) shows, that the Indian unemployment rate has been lowest in January to 6.57% since March 2021, to a steep high of 8.10% in February 2022, and again at its subtle dip to 7.60% in March’22. This could be on the back of easing Covid restrictions since the second lockdown as the number of cases decline across the nation.

Good and Better Jobs
One of the biggest challenges for the Indian economy today is job creation. This problematique has essentially two components i.e., creation of jobs and job creators, and secondly by ensuring that the jobs that are created are good and better jobs This can reduce inequality among sections of the society.

Creating good quality jobs is imperative. For this to happen more equitably, realigning better social security under the reformed Labour Codes as well as in the context of the Government of India’s National Guidelines on Responsible Business Conduct (NGRBC) and Sustainable Development Goals SDG Goal 8: “Foster sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all”, takes centre stage for virtuous and effective growth stimulus.

Here it is important to state that Articles 41 and 38(2) of the Constitution of India, subject to necessary wherewithal, cast responsibility on the State to enable social security and welfare of our workers. In particular, a vast majority of India’s working-age population minimises the inequalities of factors such as income, and opportunities for skills development by making effective provisions, including public assistance for unemployment benefits.

Environmental, Social, and Governance (ESG)
As global emergencies have set multiple paradigms, it is compelling us to learn a more sustainable and resilient way of working. It is pushing the conscience of the companies as well to find answers to persisting problems like welfare, workers’ rights, and climate change, triggering a rebalance in the ways of working.

Threatened by the manifestation, companies are learning new ways of perceiving socio-economic relations in the interest of making profit. There is a transition of looking at companies’ financial ratios traditionally to an indicator demonstrated through a strong value yardstick such as ESGs of any business. Top companies with ESG acquiescent statistically have shown higher performance gains than others. Thus, making it imperative to value them on ESGs, and most importantly the (S)ocial part.

The S factors include workforce diversity, along with equal opportunity, training & skill development, health & safety, and industrial & local community relations. Despite making high profits, companies with low ESG scores are thereby at risk of losing prominence in the investment horizon and thereby losing capital flows.

According to Bloomberg Intelligence, by 2025 ESG assets will increase to $53 trillion, and the size of these funds is inevitably increasing in India too. Investors are looking for ESG portfolios for their sustainable investments.

Impact Investment
An inflow of $185.3 billion into sustainability funds was reported by Morningstar in the first quarter of 2021, a solid bump of over 17% since 2020 Quarter 4. Sustainable investment along with the relevant ESG factors will guide and dominate investors globally as they look for their portfolio companies.

India too is slowly picking up the ESG momentum in attracting foreign equity. With more than 80% of the investors expressing their interest in sustainable investing, the studies show a fast shift in the outlook. In the last year, Nifty 100 peers and Nifty 50 indices have been outperformed by Nifty 100 ESG. This shows the rise in the Indian Investors’ confidence in impact investing (ESG).

Social Investing
Through 243 equity deals, $2.63 billion was received through impact investment in the year 2020. Though the overall impact of investment is increasing exponentially, social investing is still at a very nascent stage.

The focus should not only be on the concerns that plague our country such as climate change, post-pandemic recovery and gender inequality, but also on innovative approaches to sustained skilling and workers’ welfare only for growth trajectory and inclusive development. A powerful social investment should be defined by the investment in its human capital for better productivity and economic development.

The investment companies need to take a substantial look at the Social of ESG to involve workers’ welfare and skill development as part of their portfolio investments.

For example, Temasek Holdings of Singapore encourages portfolio companies in their efforts to upskill and re-skill their workforce, that is investment in Human Capital. Further, Omnivore, India, in its impact investment policy speaks of direct employment generation within portfolio companies that fall under SDG–8.

Domini Impact Investments of the USA characterises employees as “perhaps the most critical” of the “key stakeholder groups that corporations depend upon to operate and generate profits.” In its investment selection process and shareholder engagement efforts, Domini emphasises issues of compensation, diversity, training, unionisation, and health and safety. CalPERS, of the USA, refers to Human Capital as a clear driver of value in a company and its operations. While engaging with their portfolio companies, CalPERS looks into various human capital strategies and aims to understand the company’s culture, diversity, and organisational decision-making.

Since investment in human capital would also mean investing in the growth of the company, it is only pertinent to look into the best human capital management practices by allowing channelised investments in the companies through the lens of workers’ welfare and skill development making it an important determinant of investment decisions.

The authors work for CUTS International, a global public policy research and advocacy group.


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