What ESG performance means, why it matters and how you can measure it
ESG performance has become a staple of board agendas over recent years. Whether you are focused on your strategy's environmental, social or governance aspects, setting objectives and taking responsibility for achieving them has become an integral part of the board's role.
What Is ESG Performance?
The classic ESG performance definition is that it measures a company against a set of ESG criteria to facilitate investment decisions. Today, interest in environmental, social and governance issues extends beyond investors to customers, employees and other stakeholders. Millennials and Generation-Z prioritize corporate purpose over many other things when looking for a place to work. Corporates need to address, measure and communicate their ESG achievements if they want to stack up against their competitors, whether they are competing for talent or customers.
Why Does ESG Performance Matter?
There are numerous reasons for the laser-focus on ESG performance:
- External pressures: Shareholder and public activism around issues like executive compensation and environmental performance is becoming more widespread, putting corporations under pressure to address any outlying strategies.
- Needing to practice what you preach: The growing recognition of social issues and injustices means that businesses increasingly feel the need to issue a corporate response to social issues. Being able to back up your stance with metrics on your own performance and mitigating actions is essential if your deeds are to support your words.
- ESG reporting is becoming the norm: Public disclosures on ESG performance metrics are mandated in some regions and sectors, and increasingly expected in many others, as we have seen with TFCD disclosures on environmental performance and the EU Sustainable Finance Disclosure Regulation.
- There is a broader move towards socially-conscious corporations: Whether badged under CSR (corporate social responsibility), ESG or more generic corporate ethics, there's a growing sense that businesses should adopt a 'triple bottom line' approach that posits people and planet alongside profit is growing in momentum.
- There's also an increasing recognition that an ESG-led approach to business makes sound financial sense ' for both corporates themselves and those who invest in them. Investment firm Janus Henderson notes, from an investor perspective, 'ESG analysis can provide valuable insights about factors that can have a significant impact on the financial metrics of a company.' And these same metrics prove invaluable for boards aiming to improve their own firm's performance.
How Is ESG Performance Measured?
How can you measure your organization's ESG performance? There are many approaches, depending on what you aim to measure and how you plan to report the findings. While it's recognized that the impact of your ESG efforts can be challenging to measure, it's not impossible if you follow some fundamental steps.
4 Steps to Ease Performance Reporting
Step 1: Decide what you want to measure. ESG evolved from CSR, partially because the latter was too broad and nebulous to invite measurement and management. In turn, though, ESG itself is a pretty broad concept. Pinning down your priority areas is a crucial first step.
Determining the parameters of your ESG performance program gives you the framework and focus you need to get started. Priorities will depend on external and internal drivers; if you work in a historically polluting sector, reporting on your environmental performance may be your focus. If your industry comes under fire for executive compensation, this might be your priority.
Step 2: Identify your key risks. A structured approach is essential here: devising a risk framework that pinpoints and can track ESG threats and failings. Putting a degree of rigor around your ESG risks and the strategies you put in place to tackle them is the first step that enables you to identify, achieve and monitor improvements.
Step 3: Implement a robust measurement program. One of the challenges of ESG performance is that there has been little in the way of consistency around measurement. This not only makes it hard for companies to set their own goals, but it can also mean that ESG performance measurement takes place in a vacuum. With no indication of what best practice looks like, organizations may be able to measure progress but will struggle to benchmark their performance.
This is being addressed in some areas, as with the TCFD disclosures, where there are attempts to standardize reporting. But in many areas, businesses are on their own when devising their ESG performance measures and working out how to track them.
The board, management and operational teams need to collaborate to devise these measures, making them relevant, tangible and, importantly, feasible. There's no point in creating the perfect ESG performance program if it doesn't translate into reality.
Step 4: Don't over-focus on the micro or the macro. Either approach risks missing opportunities to improve performance — either because you are looking to solve single issues without addressing a bigger picture or because your focus is so broad that you fail to see the detail.
Regardless of what you need to measure and what criteria you use, one thing holds true: data is king here.
Having a single source of truth for ESG metrics — a reliable data source that gives management teams confidence in the numbers they're reporting and boards assurance that the performance they share publicly stands up to scrutiny — is vital.
Build Your ESG Performance on Strong Foundations
Driving positive ESG performance and reporting confidently on it demands that your organization has the tools and knowledge needed to transform your ESG commitments into action. You need to turn objectives into achievements via a fully integrated ESG strategy ' and then find ways to measure your progress.
Diligent's ESG Solutions will help you comply with standards and regulations; implement and evaluate risk controls, and monitor external intelligence and competitor insight. All of which will enable you to embed ESG into your business and measure ESG performance, quantifying the impact of your initiatives.
You can read more on how to achieve this by downloading our whitepaper, Operationalizing ESG: A Roadmap for Boards & Their Organizations. The paper has actionable advice on turning ESG goals into action, including advice on measuring ESG performance.
Diligent Institute’s ESG Leadership Certification helps your board members get up to speed on ESG performance and reporting, allowing for meaningful conversations when they are reviewing ESG reports.
