The world is finally waking up to the challenges we collectively face. Solving environmental, social, and governance (ESG) issues is increasingly being recognized as an essential component of modern business — failure to do so creates a no-win situation for all. In this new environmentally and people conscious landscape, businesses not only need to be committed to ESG, but also demonstrate how they’re making good on their promises.
What are ESG metrics
ESG metrics represent a way to quantify your company’s commitments to ESG. They help you measure the impact of your ESG initiatives in a more scientific way and provide insight to where you stack up against similar companies.
It’s important to note that there are no universal ESG metrics, and definitions and regulations are constantly changing. With that said, organizations such as The World Economic Forum are working toward creating a universal standard, as documented in the Measuring Stakeholder Capitalism report.
In this article, we will provide an overview of some of the most common ESG metrics including:
- Greenhouse gas emissions
- Diversity and inclusion percentages
- Living wages
- Tax paid
Why ESG metrics are important
ESG metrics quantify and enable the measurement of progress towards ESG goals. This is necessary for the following reasons:
- Tangibility of commitments: Without ESG metrics, your verbal commitments can’t be grounded in any data. This can often lead to big promises without any accountability.
- Optimizing what you measure: If you aren’t keeping track of the numbers, it can be difficult to know if you are making progress or not. You won’t be able to decide If you need to adjust if you have nothing to base the decision on.
- Transparency against progress: ESG involves many stakeholders including the public, investors, governments, and business partners. These stakeholders want to see accurate reports including details of ESG metrics so that they can evaluate your company's ESG initiatives.
When you have accurate and proven ESG metrics, as opposed to only verbal commitments, you will be more credible among ESG stakeholders which unlocks further benefits:
- Access to capital: 89% of global investors said they would like the reporting of ESG performance to be measured against globally consistent standards. Investors are increasingly looking at ESG metrics as a more rigorous way to evaluate opportunities.
- Better brand storytelling: ESG metrics can add much needed credibility when presenting your business as sustainable and people conscious. This can help avoid accusations of “greenwashing” where companies claim to be sustainable but can’t back it up.
- Less regulatory risk: Having verifiable metrics available will allow you to better navigate legal challenges.
In this sense, ESG metrics act as an accountability mechanism for everyone involved and help ensure your company stays on track toward ESG commitments.
ESG frameworks, metrics, and reporting
ESG frameworks are a set of guiding principles which companies can use to identify, assess, document, and measure their ESG commitments. These frameworks are created by governing bodies and NGO’s such as the World Economic Forum.
To make ESG more of a scientific endeavor, these frameworks outline various ESG metrics to track and monitor how you are performing against certain benchmarks. ESG frameworks, metrics, and other qualitative declarations allow you to create ESG reports.
ESG reports are documents that provide detailed transparency into your company’s ESG execution. The purpose of ESG reporting is to help stakeholders such as governments, NGO’s, investors and the public gain insight into a company's ESG initiatives so there can be accountability toward ESG goals.
Example ESG frameworks
In this article, we’re going to focus on the core ESG metrics you should know. To uncover these metrics, we studied and cross examined some of the major ESG frameworks available today:
- Future-Fit Business Benchmark
- World Economic Forum
- The Task Force on Climate-related Financial Disclosures
- Global Reporting Initiative
Check out our ESG frameworks article for a more comprehensive overview.
What are common ESG metrics and how to measure them?
As we cross examined multiple ESG frameworks, some metrics may be present in one framework but not another. Which framework you use will ultimately determine the metrics you need to consider, but if your goal is to maximize ESG for reasons other than reporting compliance, then it’s useful to have a broader view.
The nature of these metrics will also differ: Some can be quantified in numbers and percentages, whereas others may simply be a yes/no checkbox. Lastly, you will find that some of these metrics may not directly relate to your business. But it’s worth knowing these metrics because the ESG commitments of your suppliers and vendors also need to be analyzed as part of your ESG ecosystem. Your office provider and the manufacturer(s) of your employee’s equipment, for instance, may have environmental risk factors that you need to be aware of.
Environment ESG metrics
Environment refers to everything that encompasses our planet and the natural world. This includes ecosystems and wildlife, the landscape, and the climate. In the ESG framework, environment is analyzed through the impact of human activities. Note: this isn’t a comprehensive list, and you may find more specific metrics depending on the framework and business activity.
Greenhouse gases (GHGs)
Compound gases trap heat and radiation in the atmosphere which make the Earth’s surface warmer. This creates climate and environment related challenges such as the melting of the polar ice caps, which in turn leads to more natural disasters, the submergence of coastlines and the extinction of species.
How it’s measured: Levels of carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and carbon monoxide (CO).
Inclusive of greenhouse gases, other forms of air pollution include particle matter such as dust, soot, dirt, and smoke. This comes from industry, building work, petrol engines, and wildfires. Sulphur dioxide pollutants also affect air quality which come from burning fuels such as coal and oil. Air pollution causes many problems including lung cancer, unpleasant smell and unbreathable air.
How it’s measured: Particle matter per aerodynamic diameter, gas monitors.
Energy in the form of electricity can come from a variety of sources which may not be sustainable, which means its use must be moderated. For instance, the burning of coal, which creates other problems such as greenhouse gas emissions and resource loss. Energy is consumed through a variety of ways, more so if you are in the manufacturing business. Commercial offices may also expend energy through heating, ventilation, cooling, lighting, computing and refrigeration.
How it’s measured: Kilowatts per hour (kWh)
Fresh water supplies count as a limited resource and must be moderated and preserved. Currently, the technology to desalinate ocean water is too expensive, so we’re reliant on fresh water supplies to keep the world running. Water is used in many economic activities such as agriculture and manufacturing, including through daily use such as at home and work.
How it’s measured: Liters or cubic meters consumed.
Waste can come in different forms including:
- Solid waste such as plastics, metals, and other leftover materials
- Hazardous waste such as poisonous substances
- Wastewater like sewage or water polluted through industrial activity
- Radioactive waste through nuclear activity
- Other waste in the form of excess or inefficiently used energy and water
Waste causes problems because we have no efficient way to deal with it. Often, waste gets dumped into the natural environment including rivers and lakes which contribute to the destruction of ecosystems and species.
How it’s measured: Kilograms, tons, cubic meters.
The natural world is limited in terms of space, diversity of ecosystems and resources. Economic activities including deforestation, mining and offshore drilling impact the balance of the environment and can also destroy ecosystems and species. Indigenous people are also at risk of having their ancestral lands taken over by commercial entities.
How it’s measured: Land use, nature loss and resource depletion.
The actions and policies you take regarding ESG count toward ESG metrics. This can include setting up a climate oversight board or having successfully implemented TCFD guidelines. Having clear policies is the first step to ensuring action is taken toward meeting sustainability goals.
How it’s measured: Yes/no to having certain policies and implementations.
Governance ESG metrics
Governance encompasses the factors around how businesses are operated. This includes executive structure, strategic decision making, ethical considerations, and the relationship between business and the state.
Executive’s pay ratio
How much executives are paid in relation to the average employee is being brought into question. In the most extreme cases, executives may earn more than 5,000 times as much as the average employee. Broader questions around wealth inequality and the nature of value creation mean that we need to have a hard look at executive pay.
How it’s measured: Executive compensation in comparison to average employee compensation.
Quality of governing body
The background and makeup of the executive team and board plays a role in ESG. Quality of the governing body covers things like:
- The other obligations of the executive team in terms of positions and affiliations both past and present. Specifically, if there are conflicting interests at play.
- Executive diversity in terms of key social identifiers such as race, gender, orientation etc.
- Each individual’s ESG track record.
The governing body ultimately sets the strategy and culture of the organization. If there are red flags around leadership’s behavior and they have conflicting interests, mistrust and unethical behavior may flourish.
How it’s measured: Diversity ratio of executive board, number of other commitments.
Ethics and anti-corruption policy
Having a common framework of ethics in addition to anti-corruption measures. This applies to every level of the organization from the executive to entry level employees. Ethics and corruption apply to different aspects of the business including how customers are treated, how finances are managed, and how business is conducted. Without a strong ethics and anti-corruption policy, there is no guideline to identify and deal with bad behavior.
How it’s measured: Yes/no to having an anti-corruption policy.
Companies often find ways to legally pay as little tax as possible by exploiting loopholes in the system. Although this benefits the company’s growth and in turn shareholder profit, less tax paid means less money flowing into the local economy and less money for social services.
How it’s measured: Amount of tax paid, tax paid in relation to revenue.
The ESG metrics of all partners in an ecosystem of a company collectively have an impact on that company’s ESG. If your company for instance operates in an ethical way, but your partners do not, then you are indirectly enabling them through business cooperation. The ESG failures of your ecosystem may come back to haunt you if not addressed.
How it’s measured: Key ESG metrics of vendors, supplies, partners etc.
How to optimize your ESG metrics
Depending on the framework you choose, you may have as many as 20+ ESG metrics that you need to optimize for. On top of your regular business commitments, crafting an ESG strategy that can be successfully executed can be a challenge. With this in mind, it can be useful to find a framework that aligns strategy and execution such as the OKR method to ensure you meet your ESG commitments, in addition to your other business goals.
Quantive is your bridge between strategy and execution. Founded on the objectives and key results (OKR) methodology, our Strategy Execution Platform is where businesses plan successful strategy, focus and align teams to it, and stay on the leading edge of progress.
As your company looks to achieve the best possible results, you need a modern approach to run your business and change your business. The Modern Operating Model brings strategy, teams, and data together to help make decisions faster, optimize operations, and drive better business outcomes.
Whether you’re a large enterprise facing competitive disruption or a small business leading the innovative charge, Quantive helps gets you where you want to go.
Ready to achieve the best possible? Start using Quantive for free.