How pension funds are using human capital data to reduce portfolio risk

Human capital risk refers to the potential negative impacts on a business, such as decreased productivity, financial loss, or reputational damage, stemming from workforce-related issues. For pension funds managing portfolio companies, these risks can materialize in ways that directly affect valuations, operational stability, and long-term returns. In this post we explore what social factors present portfolio risks for pension funds and how granular human capital data can help to overcome them.

Companies with weak labour practices have higher risks of facing strikes, regulatory fines, and reputational damage. Boards lacking diversity may underperform on strategic decisions. These are not abstract ESG concerns, they are material risks that can affect returns. Yet most pension funds lack the data granularity to measure these risks effectively.

Traditional ESG ratings provide a single composite score that often masks underlying workforce issues. A company might score well overall while hiding severe supply chain violations or workforce pay inequality across different levels of the organization. Pension fund CIOs and portfolio managers need decision-ready data that reveals what is actually happening within their portfolio companies.

Denominator's granular human capital database helps investors overcome these risks. In this article, we explain how leading pension funds are using workforce data to identify portfolio risks, meet regulatory requirements, and strengthen their active ownership strategies.

‍What is Human Capital Risk?

Human capital risk refers to the potential financial and operational impacts on a company caused by how it manages its workforce. For pension funds managing portfolio companies, these risks can materialize in ways that directly affect valuations, operational stability, and long-term returns.

Unlike environmental risks that are often visible in physical assets or regulatory filings, human capital risks are embedded in organizational practices, leadership decisions, and workforce dynamics. A company might appear financially sound on traditional metrics while carrying significant exposure to workforce-related vulnerabilities that can disrupt operations and erode shareholder value.

These risks typically manifest across several dimensions:

• Employee turnover: Elevated turnover compared toindustry peers often indicates cultural issues, compensation problems, or leadership instability.
• Talent attraction and retention: the inabilityto attract and retain top talent can stall product development, slow market response, and limit growth potential.
• Regulatory and compliance risks: Workforce-related regulatory violations can trigger substantial fines and legal exposure. These events create immediate financial liabilities and long-term reputational damage.
• Reputational damage: Workforce controversies, whether labor disputes, discrimination allegations, or supply chain violations, can severely damage brand value and customer relationships.
• Productivity and performance: Poor workforce management directly affects operational efficiency. Companies with weak health and safety records face higher incident rates and associated costs.

For institutional investors, these risks represent measurable exposures across portfolios that can be identified, benchmarked, and monitored with the right data infrastructure.

Why Pension Funds Need Human Capital Data

Three converging factors are driving pension funds to prioritize workforce data in their investment processes.

Regulatory requirements are expanding

The regulatory landscape for pension fund ESG reporting has shifted dramatically. In the EU, SFDR requires asset owners to report on specific Principal Adverse Indicators (PAIs), including several that directly measure workforce practices. These include PAI 12 (gender pay gap), PAI 13 (board gender diversity), and indicators covering human rights policies and labour standard controversies. This means pension funds need actual, verifiable data on these specific workforce metrics across their portfolio companies to meet SFDR requirements.

In the UK, the Financial Reporting Council's Stewardship Code sets expectations for how pension funds demonstrate responsible ownership. The updated framework requires pension funds to show evidence of active stewardship on material ESG factors, including social and workforce issues. Asset owners must explain how they identify, escalate, and monitor these concerns across their holdings. This shifts the bar from having a policy on social factors to demonstrating concrete actions informed by data.

Meanwhile in the US, SEC human capital disclosure rules require public companies to disclose information about their human capital resources, including measures or objectives that management uses to manage the workforce. This creates a new layer of mandatory corporate disclosure that pension funds can analyze when evaluating US holdings and assessing workforce management quality.

Fiduciary duty includes workforce risks

Pension fund trustees have a legal obligation to identify and manage all material risks to beneficiary returns. Research from JP Morgan and other institutions demonstrates that human capital management correlates with financial outcomes. Companies with poor labour practices can face strikes, regulatory sanctions, and talent flight — events that can destroy shareholder value. Conversely, companies with strong workforce management practices can show more resilient performance over time and are better positioned to attract and retain talent.

This matters particularly now. As companies navigate a tight labour market, many are reorganizing to attract, retain and motivate their workforce. Investors are increasingly looking to understand how companies assess and monitor human capital management and corporate culture.

Beneficiaries expect accountability

The incoming generation of investors differs markedly from their predecessors. A 2025 survey by the Morgan Stanley Institute for Sustainable Investing revealed that 99% of Gen Z and 97% of Millennials are interested in sustainable investing. Furthermore, 68% of Gen Z and 65% of Millennials allocate more than 20% of their portfolios to investments with positive social or environmental impacts. Younger investors not only allocate more to sustainable investments but also plan to increase these allocations at higher rates than older generations. Over 90% of Gen Z investors say they would choose an advisor or platform based on the quality of sustainable investing options.

‍
Human capital data provides the evidence base pension funds need to respond with concrete actions rather than general commitments.

What Data Do Pension Funds Actually Need?

Not all human capital data is equally useful for portfolio management, and not all workforce factors are equally material across sectors or geographies. Financial materiality refers to the degree to which a factor affects company financial performance, and this varies by industry and context. Denominator is currently conducting extensive research on which specific human capital dimensions are most financially material across different sectors, with expected results in Q2 2026.

However, regardless of the specific dimensions prioritized, there are three key criteria for evaluating whether workforce data is actually useful for investment decisions: granularity, comparability, and coverage.

Granularity means seeing below the surface of composite scores. A single ESG rating might tell a pension fund that Company A scores 72/100 on social factors, but that aggregated number doesn't reveal the underlying reality. Does the company have women in board leadership roles? Is employee turnover elevated compared to peers? Are there labour rights concerns flagged in supply chain audits? What is employee sentiment based on internal surveys or external reviews? Denominator's human capital data provides this depth, enabling pension funds to understand not just that a company has a diversity policy or human rights statement, but how workforce practices actually compare to industry benchmarks and whether key metrics are improving or declining over time.

Comparability is equally critical. Without comparable data across holdings, it becomes nearly impossible to differentiate between industry leaders and laggards on human capital performance.

Finally, coverage ensures portfolio-wide visibility. Many ESG providers focus primarily on large-cap companies, which creates a significant blind spot for pension funds that also hold mid-cap, small-cap, and private companies. Denominator's coverage spans 10 million companies across 195 countries, including emerging markets and private equity holdings that traditional providers typically miss.

Case Study: How Smart Pension Uses Human Capital Data

Smart Pension, a master trust managing retirement savings for over 1.3 million members, is the first UK pension fund to publicly evaluate human capital performance across all companies in its equity portfolio.

This social and human capital analysis provides the fund with far more than a portfolio-level snapshot. It delivers insight into how each individual company performs on leadership composition, workforce practices, and people-related risks — a level of visibility more commonly associated with environmental metrics.

Key benefits for Smart Pension:

• Company-level transparency: Identifies specific holdings with elevated human capital risks rather than relying on aggregated portfolio scores
• Stewardship prioritization: Informs which companies require active engagement on human capital issues
• Voting alignment: Supports proxy voting decisions on board composition and executive compensation with data
• Active ownership demonstration: Strengthens the fund's ability to act as a responsible investor with evidence-based decisions

This approach represents a shift from viewing social factors as a compliance exercise to treating human capital data as an essential input for investment analysis and active ownership.

Nordic Pension Funds: Building the First Industry Benchmark

Denominator's analysis of Nordic pension funds provides a data-driven overview of how major Danish, Swedish, Norwegian, and Finnish pension funds' equity portfolios perform on key human capital dimensions. This work demonstrates the value of industry benchmarking for identifying portfolio risks and driving collective improvement.

The results reveal that a significant share of investments remain exposed to companies with lower human capital performance. This exposure represents a potential risk for long-term value creation, as weak practices in areas such as leadership diversity, employee turnover, pay equity, or workforce well-being can undermine productivity and corporate resilience.

The First Industry Benchmark for Human Capital

Building on its work analyzing Nordic pension funds, Denominator is now creating the first industry benchmark for human capital performance in the pension sector. While environmental benchmarks have become a cornerstone of sustainable investing, there is no widely accepted equivalent for social and human capital performance. Without it, asset owners lack a consistent reference point for evaluating workforce practices, leadership composition, pay equity, and labour rights across their portfolios.

Pension funds can share their portfolios with Denominator and participate in the first industry benchmark on human capital performance in the pension sector. Results will be anonymized as the purpose is not to rank pension funds against each other but rather creating a benchmark for comparison. There is no cost to participate, and asset owners will be offered detailed insights into their own portfolio.

Pension funds can register to participate in the benchmark here.

How Pension Funds Integrate Human Capital Data

For existing holdings, workforce data informs engagement priorities and stewardship strategies:

• Identify companies in the bottom quartile on specific metrics (diversity, turnover, safety incidents)
• Use benchmarking data to show companies where they rank against peers
• Track progress on committed improvements over time
• Escalate concerns through proxy voting when engagement doesn't yield results

On the reporting side, human capital data enables pension funds to meet regulatory requirements with specificity:

• Report SFDR PAIs with actual data rather than estimates
• Demonstrate active stewardship to beneficiaries with evidence of engagement outcomes
• Respond to trustee and member questions about portfolio social performance with concrete metrics

Conclusion

Pension funds face measurable human capital risks across their portfolios.

The path forward combines three elements: granular human capital data, active engagement strategies, and industry benchmarking that creates transparency and accountability.

Leading pension funds like Smart Pension have demonstrated that company-level workforce data can inform stewardship decisions, support regulatory compliance, and strengthen active ownership. The Nordic pension fund analysis shows that even in progressive markets, significant capital flows to companies with concerning human capital practices.

For pension fund CIOs and portfolio managers, the tools are now available. For the first time, pension funds can participate in a global industry benchmark and access portfolio insights at no cost in exchange.

Participate in the first industry benchmark for human capital and access insights from your portfolio.