ING IM stresses impact of Human Capital on long term risk adjusted returns
The portfolio managers of ING Investment Management’s (ING IM) EUR 1,5bn Sustainable Equity strategies regard human capital as an important value driver to achieve better long-term risk adjusted returns. Human capital – which encompasses factors such as talent, training, employee satisfaction, working conditions, labour relations and diversity – is probably an organisation’s most valuable intangible asset, says Nina Hodzic, Senior ESG (Environmental Social and Governance) specialist at ING IM.
Research suggests that physical and financial accountable assets on a company’s balance sheet traditionally comprise less than 20% of the true value of the average firm. The remaining 80% consists of intangibles such as human capital, stakeholder capital, strategic governance and environment. ING IM’s approach combines financial analysis with a rigorous analysis of the hidden investment risks and value drivers that determine which companies will be long-term winners.
Nina Hodzic comments: “Human capital – especially employee satisfaction – is one of the key drivers of value creation in many sectors. Happy employees are more engaged and loyal. Low turnover means that good employees stay and are more productive. This has, generally speaking, a positive impact on company’s performance long term as it leads to higher expected future cash flows and lower risk. This is supported by an increasing number of academic studies. For example, Edmans  shows that companies that were ranked as best-to-work-for in America produce an alpha of 3.5% annually above the risk-free rate (2.1% controlling for industries). Best-to-work-for companies exhibit also substantially more positive earnings surprises and stock price reactions than their industry peers.
“As economies in the West move from capital intensive firms – often combined with unskilled labour – to human capital-intensive firms, using high skilled innovative labour, investors will need new methodologies to assess the intellectual and creative strengths of companies and their constituent human capital.”
In order to maintain human capital advantages, ING IM believes that companies should look to increase training and development and build passion and purpose as young people look more and more for “meaningful work” benefiting the broader society. Diversity is also viewed as an increasingly important strength if companies are to understand the needs of those they look to provide services for, the asset manager highlights.
“The number of young people classified as NEETs (not in formal education or training) is a huge problem for governments and private sector companies. Universities, governments and companies will have to work together to ensure young people gain access to the training and skills needed to succeed in an increasingly human-capital focused environment and competitive employment market.”