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| 4 minutes read

Workforce disclosures: US leading the (regulatory) way as EU and UK trail on “human capital”

In the post-pandemic era, companies are increasingly aware of the value, as well as the cost, of their employees. This is starting to be reflected in changes to employers’ reporting practices. However, set against the wider ESG reporting context – especially environmental disclosure requirements – the rules on disclosing data related to a company’s workforce of “human capital” are at a nascent stage.

While the US commonly trails behind the EU and the UK in imposing ESG-related regulations, proposed reforms suggest that the US is leading the way in human capital disclosure rules, which may in time set the global standard.

In August 2020, the US Securities and Exchange Commission (the “SEC”) introduced a requirement for public companies to disclose their human capital resources where material to understanding their business. In June 2022, the Working Group on Human Capital Accounting Disclosure (the “Working Group”) petitioned the SEC to require more granular disclosure. The proposed disclosure aims to help investors separate “workforce costs” into: (i) investments in the workforce; and (ii) maintenance workforce expenses. In particular:

  • how much workforce costs can be considered an investment in future growth;
  • treating workforce costs in the same way as research and development costs, so that investors can consider workforce costs in their valuation models; and
  • greater income statement disaggregation, to give investors more insight into workforce costs and the expected value creation of employees.

While the SEC enjoys broad authority to make rules, it is not yet clear whether the reforms petitioned by the Working Group will become law. Despite the limited fallout from the 2022 mid-term elections with the Democrats retaining control of the Senate, a win for the Republicans in the 2024 presidential election would render the proposals potentially vulnerable to new appointments to the SEC board (which are made by the US President and confirmed by the Senate) of members who oppose the proposals. The SEC may also be cautious about imposing further, detailed reporting requirements given the backlash among US banks (and others) and potential court challenge to climate disclosure requirements brought in by the SEC in March 2022.

Outside the US, the scope of the EU’s 2014 Non-Financial Reporting Directive (the “NFRD”) is being widened by the proposed Corporate Sustainability Reporting Directive (the “CSRD”), which was adopted late last month and will introduce more detailed reporting requirements. These include a requirement to report according to mandatory EU sustainability reporting standards being developed by the European Financial Reporting Advisory Group, which will contain human rights as well as environmental elements. A Corporate Sustainability Due Diligence Directive (the “CSDD”) is also being developed by the EU, which will require in-scope EU and non-EU companies to assess and then address their adverse human rights and environmental impacts (and report on them under the CSRD).

The CSRD targets a more employee-centric approach to reporting than the SEC measures, including requirements to report on working conditions, equal pay for equal work and work-life balance. The implemented and proposed SEC measures are investor-centric, aiming to provide clarity to investors on the role of employees in value creation. There is crossover between the US and EU regimes with both requiring reporting on wages and investment in training and skill development, which can provide insight from both the employee’s and the investor’s perspective.

Due to Brexit, whilst the UK did adopt the NFRD, it won’t adopt the new CSRD, although the Government has stated that it is intending to bring in a UK equivalent in the form of the Sustainable Disclosure Requirements regime. It has also said it doesn’t intend to match the CSDD. Instead, the UK Government is focussed on maintaining existing measures such as modern slavery reporting. Requirements to report workforce data in the UK are spread across multiple authorities, including the obligation: (i) in the International Financial Reporting Standards to disclose basic figures on employee benefits such as pay, annual leave, bonuses and non-monetary benefits; and (ii) to produce a statement in the strategic report describing how the directors have had regard to their requirement to consider the interests of employees.

However, in practice, it is common for companies to go further than the legal requirements and also explain, for example, methods of communicating with the workforce, feedback mechanisms on the operation of the company to management, and career development initiatives. This more detailed, narrative disclosure is driven not only by legislative authority in the Companies Act 2006, but also by guidance from the Financial Reporting Council and institutional investor groups including the Investor Association (the “IA”).

Investor expectations (outlined in IA guidance, for example) are that companies should disclose information that illustrates the role played by the workforce in generating value for shareholders. This includes investments to improve the productivity of the workforce; opportunities and risks related to human capital management; and the way in which the workforce is incentivised to be more productive. Best in class reporting in the UK approaches the level of disclosure mandated in the SEC proposals, requiring the disclosure of data to assist investors in understanding the cost and benefit of investment in the workforce. However investor guidelines do not dictate the form this should take in such detail as the SEC proposals which include, for example, the disaggregation of the income statement to better identify different classes of workforce cost.

In the human capital reporting space, investor guidance and social pressure have also encouraged more fulsome reporting, albeit without such detailed legal requirements as those currently being debated in the US. It may be that, in time, the US human capital requirements set the standard that will force the EU and UK to follow suit.


diversity, employment, governance, human rights, social impact