People power & sustainability

AUTHOR: Dr Carol Royal and Loretta O'Donnell   DATE: 06.09.07   ISSUE 1, 2007

Several programs developed across business schools tend to have a theme of education about sustainability, rather than a focus on education for sustainability – that is, developing skills to work within and improve the quality of sustainable organisations. In particular, there is a gap in professional development of both investment managers and financial analysts concerning the social aspects of sustainability, including human capital, and how to analyse them from an investor’s perspective.

Several programs developed across business schools tend to have a theme of education about sustainability, rather than a focus on education for sustainability, writes Dr Carol Royal.

Photo: Anthony Geernaert

There is an increasing awareness of intangible value within listed firms and with the widespread use of the United Nations Principles of Responsible Investing, the pressure is on investment managers and financial market analysts to use tools other than those that focus on tangible assets, and tend to generate commoditised investment products and investment research on listed firms. However, there have traditionally been few models for analysts to use to interpret and use qualitative human capital data.

To overcome the knowledge gap, UNSW academic staff members Dr Carol Royal and Loretta O’Donnell have drawn on award-winning research to assist professionals to focus on the analysis of human capital, from the point of view of investors. Professionals are challenged to develop skills in human capital analysis on listed firms, using publicly available information, to give them insights into potential future financial organisational performance. They rate the relative strength of human capital systems of a group of ASX listed firms, according to selected human capital metrics and models, to provide insights to potential investors. Professionals with backgrounds in accounting, finance, environmental management, management and human resources all contribute different perspectives to help bridge the knowledge gap in the marketplace. O’Donnell and Royal have been lending their expertise to both European and Australian funds managers and investment banks, who have recently created financial products based on human capital analysis and/or used human capital research as a filter based on the evidence that human capital is a lead indicator of future financial performance.

As one portfolio manager noted recently, human capital potentially provides a key factor in assessing whether a listed firm is able to execute its strategy. This is an increasingly critical concern of capital markets, which need to be able to analyse and invest in the potential future value of firms.

Even more widespread professional development of analysts and advisors to the financial markets is needed, incorporating additional models, frameworks and expert systems designed to codify and accelerate insights from the principles of human capital analysis. Once the investment management and securities and derivatives industries are more systematically educated in human capital principles, the more we are likely to see increased pressures on listed companies to improve and to disclose the specific ways in which their human capital systems are designed to execute corporate strategy and enhance future firm value.

Dr Carol Royal and Loretta O'Donnell are researchers in the School of Organisation and Management.