As the U.S. Securities and Exchange Commission (SEC) contemplates new rules in 2022, human resources (HR) may come into focus.

In 2020, the SEC amended a rule requiring companies to disclose "human capital resources" if those resources are "material to an understanding of the registrant's business," but the rule did not provide much detail. That could change this year. A Notice of Proposed Rulemaking on board diversity is expected in April, and an updated Notice of Proposed Rulemaking on human capital management disclosures could also be on the horizon.

Because of these seemingly possible changes, investors are pressuring companies on various aspects of environmental, social, and governance (ESG) issues, Don Delves, North American executive compensation business leader at Willis Towers Watson, told HR Dive. But he noted that this is not the whole story.

"We live in a world of higher risk and greater interconnectedness," Delves said. "2022 hasn't even been two months old, and we've had a once-in-a-century risk event like the invasion of Ukraine." He noted that investors want to reduce such risk, and more boards are recognizing the role human capital plays in that.

But this also means the CHRO role will continue to undergo fundamental transformation, sources told HR Dive.

A new old narrative

This shift in ESG pressure has been a long time coming, sources said.

"There are more entities looking at it now," Kari Niedfeldt-Thomas, managing director at Chief Executives for Corporate Purpose, told HR Dive. Among ESG metrics, the "E" (environment) often gets most of the attention, but Niedfeldt-Thomas said investors are now also increasing pressure on the other two factors (social and governance), which directly involve HR.

"A lot of companies are not just getting on the bandwagon now," Rebecca Ray, executive vice president of human capital at The Conference Board, told HR Dive. Ray noted that purpose-driven companies were already on this track before the SEC pressure.

For example, some companies have already tied executive compensation to diversity and inclusion metrics. Others have created executive roles related to ESG strategy, Willis Towers Watson reported in late 2020. One of the biggest challenges in implementing these changes is understanding how to measure success and then holding the right people accountable for it—a challenge that may be familiar to HR practitioners now.

But not every HR department is prepared for this, Ray said, and now there is executive pressure to be ready. "A lot of people are going to have to think about how to tell the human capital story as it relates to the broader stakeholder narrative," she said. "This is by no means a new concept, but the pressure is greater now than it has been in the past."

Among these stakeholders are employees. Individuals want to work for a company that aligns with their personal values, Ray said; experts have long noted this. But although ESG topics have seen increased interest at the board level, that interest has not yet "fully translated into comprehensive HR programs," Marie Holmstrom, Southeast market leader for talent business at Willis Towers Watson, told HR Dive.

That could soon change as well.

HR's place in the plan

The pandemic accelerated awareness of the employee experience, Holmstrom said, and many organizations realized its importance in competing across various markets.

"We see a greater opportunity and connection where companies are not just reporting on ESG, but also on their ESG principles and how those translate into actual employee retention," Holmstrom said. In other words, employees increasingly want to work for companies with clear missions and guiding philosophies.

HR may also play a key role in defining where a company is headed on diversity, inclusion, equity, and other important ESG aspects: "These leaders now need to not only collect and disclose data, but also set goals," Niedfeldt-Thomas said.

This approach may still be new to many CHROs, Ray said, especially those who think about the employee lifecycle more holistically. But Niedfeldt-Thomas said HR will be a key component in ensuring ESG disclosures not only happen but also demonstrate a company's commitment to important initiatives, including diversity.

But many departments are not yet at that level, Holmstrom said. "What we see is that components of ESG focus have existed within HR strategy for some time, especially around DEI," she said. "When it comes to the full agenda, we don't see HR fully embracing the strategy or program and embedding it into people plans."

But companies do seem serious about these changes, according to Delves. "If a company is going to give up 5% or 10% of the 100% it allocates to various performance metrics and put it on DEI, to me, that says they're serious. This is not something they would do lightly."

What boards need from CHROs

To meet these expectations, CHROs and HR leaders must be proficient with data, Ray said. They need to use data to support their recommendations on action plans to achieve ESG goals.

"CHROs need to sit with their C-suite colleagues and view human capital strategy as part of business strategy," Ray said. "They should not sit in the corner waiting to be noticed." Instead, Ray continued, people strategy should be the glue that holds the company together.

HR leaders should expect more questions from board members about DEI—smarter, more detailed questions, Delves said; "We have more diverse members coming onto boards. More diverse members ask more diverse questions, there's no doubt about that."

Expect questions about goal setting, Niedfeldt-Thomas said. "Is your company tracking board diversity? Employees? Management? Have they set goals for how to achieve those?" she said. "All of this work requires employee time. If a company is not investing in this, you might run into some challenges."

A mission to lead

The good news is that HR is in a position to lead the way—including by finding leaders who can demonstrate a company's stated values and understand how ESG drives a good employee experience, Holmstrom said.

"HR can absolutely own DEI as a strategic priority for the organization," she said. "HR can absolutely own the shift to a more innovative culture."

The aftermath of the COVID-19 pandemic has further underscored the importance of people strategy, Ray said. Building a strong employer brand is important, and ESG will be intrinsically linked to it—especially in driving change beyond glossy marketing materials. "If you want to attract the best and brightest, your inside has to match your outside," Ray said.

To achieve these goals, however, HR needs to collaborate across the company, building partnerships with various departments. For example, building a company's leadership pipeline may not reside solely within HR, Niedfeldt-Thomas said; "Teams have to work cross-functionally to get more done."

Most importantly, sources said, the growing focus on ESG means HR has an opportunity to lead the way, especially in DEI.

"[DEI] is no longer just an internal company matter. Now it's disclosed to investors. Investors are asking about it," Niedfeldt-Thomas said. "Leaders have to understand that the world has changed."