ESG metrics: What matters, and what should you measure?
As ESG (environmental, social and governance) concerns move higher on the board’s priority list, ESG metrics simultaneously become more critical. With ESG one of the identified most significant business risks in 2022, measuring and reporting on your ESG performance is becoming non-negotiable for organizations wanting to evidence their credentials around integrity, sustainability and compliance.
The Challenges of Measuring ESG
In some areas of business, measurement is difficult because gathering data is a challenge. This isn’t necessarily the main issue with ESG metrics; as the Financial Times notes, the problem when measuring ESG “is not a lack of data but an oversupply of tools and frameworks.” As a result, it can be “really challenging to understand what measures are meaningful.”
How can you distill the nuggets from the fools’ gold in an area where a wealth of potential ESG data points and measurement tools are springing up? What are the ESG measures and ESG indicators that drill directly to the crux of your performance? How can you identify the ESG metrics that matter?
What Are ESG Metrics?
Defining key ESG metrics must be an early step in your ESG measurement journey. Coming up with an ESG metrics list isn’t always easy, though. ESG impact metrics will cover both standard metrics — those codified into standards written by industry associations, research and evaluation organizations — and custom metrics specific to your sector or business.
ESG Metrics Examples
ESG metrics, as you’d expect, cover data spanning environmental, social and governance performance. When coming up with a list of ESG metrics, it helps to split them into these three areas: environmental, social and governance, and to identify some standard ESG metrics that all organizations should be tracking.
Sustainability ESG Metrics
Environmental and sustainability metrics are arguably the most high-profile of all ESG indicators. With climate impact in the spotlight and SEC requirements around climate-related disclosures growing, it’s essential to make sure you can quantify performance on sustainability and climate risk measures.
This might include:
- Measuring your greenhouse gas emissions
- Monitoring your carbon footprint
- Understanding and quantifying your water footprint
- Tracking your energy efficiency and programs in place to improve it
- Keeping abreast of emerging contaminants that may not yet be on the regulatory radar but may garner increasing scrutiny over time
ESG Governance Metrics
Metrics focusing on the “G” of ESG can be the hardest to pin down.
Governance broadly focuses on a few key issues:
- Structure and oversight
- Codes and values
- Transparency and reporting
- Cyber risks and systems
Metrics to quantify your performance in each of these areas might cover things including:
- The governance structures and frameworks you have in place
- How the board oversees governance — what checks and reporting are in place to ensure senior oversight of vital metrics?
- Does your organization have clear values and purpose? How do you measure compliance with these values and alignment with your purpose?
- What reporting do you produce on ESG and other issues? Do you limit reporting to mandatory disclosures, or are you proactive in voluntarily reporting, even when there’s no obligation?
- Does your business act ethically and with integrity? How do you quantify this? Ethical practices can be hard to define: the CFA Institute describes ethical principles as those that “go beyond that which is legally sufficient and encompass what is the right thing to do.” This can be a nebulous concept to measure.
- How often do you audit your ESG practices?
- What cybersecurity practices do you have in place? How do you measure and monitor cyber risks and mitigation strategies?
- How do you measure up on health and safety; do you measure breaches and steps to improve performance?
Social ESG Metrics
The “S” of ESG focuses on all the social elements of your policies and practices. Social ESG metrics might include:
- Metrics on pay: how are you tackling the gender pay gap?
- Metrics on diversity, equity and inclusion: what DEI strategies are you employing to create a fairer organization? What impact are they having?
- What is the makeup of your business; are you providing equal opportunities for local employees?
- How diverse is your board; are you meeting your goals on diversity in leadership, to drive diverse thinking and informed decisions?
- Diligent Institute’s research, focusing on women in the boardroom, identified that women are twice as likely to have sustainability experience than their male counterparts and offer a higher level of independence.
- Numerous reports, including this one from McKinsey have identified a link between organizational diversity and financial performance.
- It makes sense that ESG metrics enabling you to monitor and improve your corporate diversity should be a priority for any business.
Supply Chain ESG Metrics
When you’re assessing ESG performance, you cannot assume that your responsibility stops at your corporate boundaries. Any ESG failings in your supply chain are liable to impact your standing, and as such, you need to take an interest in your suppliers.
World Economic Forum ESG Metrics
In 2020, the World Economic Forum (WEF) published Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation. The document was developed following the 2020 Annual Meeting in Davos, where 120 of the world’s largest companies supported efforts to develop a core set of common ESG metrics and disclosures.
The metrics set out in the WEF report were developed in conjunction with the “Big Four” accountancy firms: Deloitte, EY, KPMG and PwC. They are designed to be a set of universal ESG metrics and disclosures that can be used by both members and non-members of the WEF’s International Business Council.
The metrics comprise 21 core and 34 expanded metrics and disclosures.
The 21 core metrics are primarily quantitative and cover data that is already being collected for other forms of organizational reporting.
The 34 expanded metrics and disclosures tend to be less well-established in existing practice and standards.
The WEF describes the metrics as “deliberately based on existing standards, with the near-term objectives of accelerating convergence among the leading private standard-setters and bringing greater comparability and consistency to the reporting of ESG disclosures.”
Devise ESG Metrics That Support Your Journey to ESG Best Practice
As your ESG program matures, having the right metrics and measurements in place underpins your success. Finessing your tactics; swiftly identifying areas that need action; refining your ESG strategy — all of these depend on accurate, comprehensive ESG data.
- Drives your environmental, social and governance approach
- Pinpoints flaws before they become failings
- Enables you to prioritize spending and resources on the areas that matter
- Most importantly, the data you glean from your ESG metrics provides robust evidence for your ESG disclosures, which are fast becoming expected and mandated in many cases.
If you’re bolstering your approach to ESG metrics to prepare for mandatory disclosures, you will be interested in our whitepaper, How to Prepare for Mandatory Disclosures. The whitepaper covers six core components, and you can download your free copy below.