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Understanding ESG metrics in 2023
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In today's business landscape, ESG (Environmental, Social, and Governance) metrics have emerged as a pivotal tool for assessing a company's impact and sustainability. These metrics evaluate a company's dedication to environmental practices, social responsibility, and ethical governance - not only addressing global issues but also attracting investors seeking responsible and transparent investments.
👉 In this article we’ll explore the definition of ESG metrics, their benefits, and how companies can select the right metrics and frameworks to align with their goals.
First up, a reminder on what ESG stands for
ESG stands for environmental, social, and governance. It’s a set of factors that help to measure a company’s impact on the environment and society, while also measuring how transparent and accountable the business is.
“ ESG measures how a business integrates environmental, social, and governance practices into its operations and business model. It allows stakeholders to assess the impact of these practices and to assess the company’s overall sustainability. ”
ESG is an increasingly important aspect of today’s business environment. Not only do ESG policies help to address global issues such as climate change, resource scarcity, and social inequality, but companies with strong ESG initiatives are also able to reduce operational risks, optimize business costs, and ensure compliance with regulatory requirements. This makes them a much safer, and more attractive investment option.
A refresh on environmental, social, and governance
The E in ESG
The E in ESG stands for environmental. To put it simply, this aspect focuses on how the business impacts the environment through its operations, supply chain, and products and services. Examples of environmental business practices include things like reducing energy or switching to renewable sources, developing sustainable products, reducing carbon emissions across the company, or implementing a waste reduction program.
The S in ESG
The S in ESG stands for social. This dimension emphasizes a company's internal culture and its ripple effect on the broader community. It encourages businesses to deliberate on their proactive contributions to the greater society, ensuring not only the equitable and just treatment of their employees but also the well-being of those in their supply chains and nearby communities affected by their operations.
The G in ESG
The G in ESG stands for governance. Governance encompasses a business’ decision-making, logistics, and reporting. It aims to promote ethical company behavior and transparency. Examples of policies that might fall under the banner of governance include those that minimize the risk of bribery or unethical behavior, policies that promote transparency and ensure that senior management is accountable for company performance and risks, and those that foster diversity in the leadership team.
👉 To read more about ESG and its benefits, head over to our article on the topic.
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What are ESG metrics?
Now that we’ve had a refresh of the basics of ESG, what exactly do we mean by ESG metrics?
ESG metrics are performance metrics used to measure the effectiveness of a company’s ESG policies. They provide invaluable information to a company about their ESG risks and opportunities, helping them to operate in a more ethical manner. ESG metrics also foster transparency, allowing the company’s stakeholders and investors to evaluate a company’s risks and opportunities associated with ESG topics.
ESG metrics are also useful as they facilitate industry benchmarking, which enables investors and other stakeholders to compare the ESG performance of a company against others in the same industry. Investors in particular increasingly care about how the companies they invest in impact the world around them, and so companies with strong ESG performance tend to be seen as more attractive - and less risky - investments.
Let’s take a closer look at some of the benefits of using ESG metrics…
- Proves commitment - without ESG metrics it is very difficult for a company to prove their commitment to issues such as climate change, the environment, and human rights. ESG metrics provide the data to back up such company claims.
- Tracking progress - without actually measuring ESG performance a company won’t be able to determine if it’s making progress or not. ESG metrics can also flag areas for concern, or areas of risk, allowing the company to make improvements.
- Transparency - we’ve already touched on this in the previous section, but it’s worth mentioning again. Transparency is increasingly important in the business world - a variety of different stakeholders demand it. From customers to investors to governments and the general public, stakeholders want to see accurate and transparent ESG reporting.
- Investment - a majority of global investors have said that they want the reporting of ESG performance to be measured against globally consistent metrics. ESG metrics provide a more rigorous way to evaluate and compare companies.
- Marketing and brand reputation - ESG metrics provide credibility to a company’s sustainability claims. Companies are increasingly getting called out for acts of greenwashing. Rigorous ESG reporting helps to reduce this risk.
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Is there a global ESG framework?
There is no universally recognized, mandatory ESG framework that companies must use. Instead, there are a variety of different frameworks that a company can select from. These frameworks provide guidance for companies in the identification, measurement, and documentation of their ESG commitments. ESG metrics make the process more scientific by outlining how different ESG topics should be measured and tracked. They also help to benchmark performance.
The most commonly referred to ESG reporting framework is the GRI - many other ESG frameworks are based on the indicators and metrics contained within this framework. However, there is a multitude of well-known and respected frameworks that companies may also select from - for example, the ISSB, SASB, SBTi, TCFD, and the ISO Standards to name just a few.
The wide variety of ESG frameworks and standards that are available offers flexibility for companies who are able to select the framework that they believe works best for their business. However, it also makes the ESG landscape more complex and can make it harder for stakeholders and investors to compare the ESG credentials of different companies as different metrics may be used depending on what framework they selected.
👉 To learn more about ESG reporting why not check out our article.
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Examples of ESG metrics
While ESG metrics will vary depending on what framework a company selects, we’ve outlined a few examples under each of the three pillars to give you a better idea of what ESG metrics are commonly used, and what their measurement might entail.
Examples of environmental metrics
- Greenhouse gas emissions - Greenhouse gases are the primary cause of global warming, and companies are responsible for producing a significant portion of annual global emissions. This is why measuring the emissions associated with a company’s operations, products and services and supply chain is so important. Many governments around the world are also moving to mandate company reporting of greenhouse gases. Metrics used to estimate the impact of greenhouse gases typically focus on carbon dioxide (or carbon dioxide equivalent), measured in tonnes or kilograms.
- Air pollution - Besides greenhouse gases, other forms of air pollution are also harmful for the environment - and may even negatively impact human health. Air pollution resulting from a company's activities can be measured in terms of particle matter per aerodynamic diameter.
- Energy consumption - Most businesses consume a lot of energy, and unfortunately in many countries around the world fossil fuels are still the primary source of this energy. This is why measuring the energy consumption of a business (usually in kilowatts per hour - kWh) can be a useful tool and mechanism for reducing consumption.
- Water consumption - Water is a limited resource, and with increasing heatwaves and droughts, water scarcity is a growing concern. Unfortunately, a wide variety of industries - from agriculture to manufacturing - use huge amounts of this resource. This is why water usage is an important ESG metric for many companies.
- Resource usage - Like water, much of the Earth’s resources are limited, and overuse can result in the destruction of entire ecosystems, threatening species extinction too. Measuring resource depletion and land use is an effective way to track a company’s impact on natural resources and to encourage it to adopt strategies to reduce this reliance.
Examples of social metrics
- Living wages - ESG metrics may look to measure the average company wage in a given area compared to the cost of living. This helps to ensure that companies are paying their employees a fair wage and that they are able to afford the basic essentials.
- Diversity - Diversity is important, including at the executive suite level. This means that different genders and ethnicities should be afforded a seat at the table. By measuring a company’s diversity percentage at different levels, we can get a better understanding of how inclusive the workplace is.
- Gender pay gap - Comparing the salaries of male employees and female employees who are performing the same role, allows a company to assess if there is any disparity in pay between genders.
- Health and safety - Work should never threaten the health and safety of employees. Not only is this detrimental from a human aspect, but it also presents a risk of legal liability. Metrics used to assess this risk include incident reports and health and safety policies.
- Human rights - Human rights are fundamental to society which is why it’s important that companies ensure that the human rights of their workforce are respected and upheld. ESG metrics used to assess this include reports of human rights violations and any company human rights policies.
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Examples of Governance metrics
- Executive pay - Executive remuneration can be a point of contention when it vastly dwarfs the majority of employees' pay. Not only does this raise issues of wealth inequality but it also represents a potential PR risk for the company. ESG metrics used to assess executive compensation include a comparison of employee pay across the different levels.
- Ethics and anti-corruption - The most crucial metric concerning this issue is the existence of an anti-corruption and bribery policy.
- Makeup of the governing body - A company’s governing body is an important aspect as they are the ones steering the direction of the company. This is why it’s not only important to ensure that no conflicts of interest exist, but it’s also important for companies to strive for better representation in terms of gender, ethnicity, etc. ESG metrics under this ESG topic may include the diversity ratio of the executive board or an assessment of conflicts of interest.
These are just a small selection of the different ESG metrics that a company may opt to measure and report on. As you can see, depending on the specifics of the metric used to measure the ESG topic a variety of different data will need to be collected. This might be a simple yes or no tick box exercise, while others may require the provision of more detailed data quantified in numbers.
How should a company select ESG metrics?
Generally speaking, it’s helpful for companies to maximize their ESG reporting and to take a broader view. A useful question to consider when selecting ESG metrics is what ESG topics are material to the business? This means that companies should consider which ESG issues are relevant to their operations, and which ones have a measurable impact on their business. A company can carry out a materiality assessment to establish those that hold the most importance.
Another useful consideration that may help to drive ESG topics, is stakeholder expectations - perhaps certain stakeholders of the company demand or expect reporting on specific ESG topics. A company may even have a legal duty to report on certain metrics.
👉 To find out more about materiality assessments why not take a look at our article.
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Which ESG framework should a company select?
A company may find that after assessing which ESG performance metrics are the most relevant, they align with a certain ESG reporting framework. Some frameworks for example can offer sector-specific standards.
Other considerations when selecting an ESG framework include factors such as industry relevance, stakeholder expectations, geographic scope, sector-specific standards, integration with existing reporting, alignment with long-term goals, data capabilities, regulatory compliance, and resource constraints. Companies should pick a framework that best suits their unique needs, reflects their industry's challenges, and aligns with their strategic objectives. Additionally, keeping an eye on evolving regulations and engaging with industry peers and experts can help inform this crucial decision and ensure that ESG reporting is both meaningful and effective.
What about Greenly?
At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required.
If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.
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