You may hear company stakeholders or investors asking what ESG metrics are all about? The acronym ESG, which stands for Environmental, Social, and Governance are metrics used to describe the transparency, sustainability and performance of a company. In other words they measure a company’s ability to survive over the long term. FYI…over 70% of carbon emissions come from the business sector. And with climate change looming, it only stands to reason that if you are doing business in sustainable ways, you will be here in the future. If not, then your days may be numbered. But don’t panic, we will help you put the ESG process into perspective and show you a few workarounds to get you going immediately.
Not that long ago, measuring a company’s sustainability was less of a priority than it is now. But with the invasion of the Ukraine, the world’s wheat supply at risk, trade wars with China and recurring billion dollar weather events happening across the globe, sustainability is now affecting the lives of every person on the planet.
Today and in the foreseeable future, if you want your business to be sustainable then environmental social and corporate governance metrics need to be taken into account. But an ESG score is no longer a “nice to have”. Moving forward from the time you read this, sustainability and transparency with be a “must have” for every business. If you want consumers to buy your products or use your services then NOW is the time to get started on quantifying your materiality (risk). Because sooner than later, someone is going to ask for it.
No matter what some may think, since the beginning of the pandemic and the invasion of the Ukraine, the state of your companies ability to prove your environmental and social efforts can no longer be ignored. But if you keep reading you will discover that times of great change are also times of great opportunity.
Why are ESG metrics important?
ESG metrics are an excellent opportunity for companies to improve their image and potentially increase performance. They are a way to make your company sustainable and are the cornerstone of information with which to write your ESG report. Now is the time to innovate, and the companies who prove themselves to be ahead of the curve will be richly rewarded.
The best thing about ESG reporting metrics is that they will reveal where your business is at risk, which will guide you on where to focus your energies. When you consider that your sustainability metrics will determine investment from stakeholders, governments and consumers, they are something that you want to get right. Having sustainable governance and social metrics is like having a blueprint to insights and opportunities that will move the needle. Many business owners are still unaware of the importance of ESG metrics and how they can impact their bottom line. And that equates to opportunity. Without understanding the value of ESG metrics, businesses are at a disadvantage and could eventually fail. But we’ve got you covered with some tips to put you ahead of your competition. So, get ready to take notes!
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How can ESG Metrics be used?
Given the situation with two years of pandemic followed by the invasion of the Ukraine and the exodus to divest from Soviet oil, it would be in the best interest of every company to use ESG metrics as a way to measure, report and ultimately improve their environmental and social performance. Many companies are now using ESG reporting as a way to build trust with stakeholders, attract investment, and improve operational efficiency. On the upside, using ESG metrics can lead to reduced costs, improved organizational efficiency and a better bottom line.
There are many benefits of using ESG metrics, but here are a few key points to keep in mind:
- Helps companies track their progress on sustainability goals
- Encourages companies to be more transparent about their environmental and social performance
- Can lead to cost savings by identifying operational efficiencies
- Builds trust with stakeholders and can attract investment
ESG metrics are becoming increasingly important in the business world, and companies that don’t use them will be at a disadvantage.
Quick Tip: The average ESG audit can take months. But many companies have discovered how to get a head start on improving their ESG score before they even begin the auditing process.
Want to have a positive effect on your ESG score right away? Then keep reading…
What are ESG Metrics Used For?
There are many different uses for ESG metrics. Nowadays, more and more companies are using these numbers to improve their image in the eyes of the public while others use it for internal purposes- say you’re a company that is trying to increase your turnover by 10%. You can use metrics to see if this goal has been reached (and if it hasn’t, which efforts need to be increased) and these metrics can also show you what the public thinks of your company. For instance, if employees believe that a certain product is good for the environment and members of the public do not then this may affect sales and therefore revenue so using these numbers can help you adapt accordingly. The way companies are ranked when it comes to environmental impact can also be used to see which companies are the most sustainable.
This is one of many different types of metrics that are used by different businesses all around the world. Companies are increasingly turning towards these numbers in order to increase their image and perform better overall- you’ll find that some businesses use them.
You may want to check out our post on How to Write a Sustainability Report
What are examples of ESG metrics being used?
One of the most well known examples of ESG Metrics being used is when clothing company Patagonia decided not to buy cotton from Uzbekistan due to concerns surrounding human rights. The company wanted to be seen in a positive light in opposition to their competitors who were still buying cotton from the region. A survey was conducted among customers who then rated how ethical they thought Patagonia was when compared with other brands. Not only did the rating increase, but sales increased too.
Another good example of ESG metrics being used is by Starbucks. The company has a program where they encourage customer feedback and the results from these surveys are then implemented into their practices. For instance, if customers don’t want certain materials to be used at all then this will affect how the business operates.
What are some pros and cons of using ESG metrics?
There are many benefits of using ESG Metrics. It can improve the image of a company by showing them how they are doing compared to other organizations. You’ll find that if members of the public believe you to be more sustainable than your competitors then this will likely increase sales and revenue while also increasing employee satisfaction since they know their workplace is being improved upon. They can also show you what people think so it’s easy to find out if there are any issues that need to be addressed.
You’ll find that some businesses prefer not to use ESG metrics for this very reason- the information may cause conflict within the company. For instance, if employees believe something is ethical but members of the public don’t then there may be disagreements over what to do. These metrics can also cost a lot of money- for example, if you’re aiming to improve your image it will cost money for surveys to be conducted in order to make this happen. You’ll find that these costs can add up over time and perhaps the business would rather save their funds for something else.
You may also want to read What is an ESG Score?
What are some ESG metrics?
There is no one-size-fits-all answer to this question, as different companies will place different emphasis on different environmental, social, and governance factors. However, some common ESG metrics that are used include greenhouse gas emissions, water consumption, waste water, energy use, waste generation, employee safety record, and community impact. But the consistent factor you need to keep in mind is that you will be measured against other companies in your industry. Apples to apples, oranges to oranges.
A good rule of thumb is to start with the industry average and compare yourself against that. If you are doing better than the average, great! If not, then maybe it’s time to reconsider your company’s environmental, social, and governance policies. But on the other hand, who wants to be average? If you step up your efforts beyond the industry average, then you will create an opportunity to share that information and engage a wider audience. If you only do the minimums, then there is a potential that your competitors will outshine you.
What is the future of ESG metrics?
Between the pandemic and the recent invasion of Ukraine every business in every country will be scrutinized for their sustainability. Supply chains are in jeopardy, the oil and gas industry has become unpredictable which has affected every industry worldwide as companies and governments scramble to correct the markets. But the biggest issue for the average company is that public awareness levels are at a peak that is not about to change anytime soon. People want the change they have been asking for for decades. . The real question is, can you afford to have someone discover that there is a connection to soviet oil or child labor in your supply chain? If it finds its way to social media it would become a PR nightmare that you may not recover from. So, to answer the question: ESG metrics are more important now than they have ever been.
An ESG audit will take months to put together, but you can start improving your ESG Score now.
How should companies be using these metrics to meet expectations?
It’s important that businesses understand what consumers, partners, governments and stakeholders want when it comes to ESG metrics. They want to know how you are performing from a sustainable perspective. For instance: if you suddenly discover that there are risks in your supply chain which might include sourcing your products or supplies from questionable sources, then this may jeopardize your relationship with them. In some cases, this can lead to to public relations challenges, which are easier to fix in advance then to correct after the fact.
You’ll find that if you’re trying to improve your company that is not as difficult as you might think. If you are suddenly feeling overwhelmed, don’t worry the world is changing fast and there are some quick and easy fixes to get you heading in the right direction. Oftentimes, just showing that you are making efforts to improve your ESG score is enough to assuage concerns of consumers, partners, governments and stakeholders.
How do ESG metrics affect our business?
There are a number of things that you can do- for example, improving the efficiency of your business will improve your social and environmental scores which may help with costs in the long run. But it will definitely send a message that you are aware of the situation and addressing the concerns. This means that by utilizing these metrics it can help with meeting consumer/partner/stakeholder expectations as well as your general company goals.
An important thing to remember is that these metrics can differ depending on what industry you are and where you business operations are geographically. For example an accounting firm in Dallas Texas will have completely different metrics from an international mining conglomerate that operates in Africa. Apples to apples and oranges to oranges. You know who your competitors are and you might start by doing a little research there. The most likely case is that you will find that your competitors have done little, or in most nothing regarding ESG. And that is opportunity!
Note: It is important to look at this information carefully before you make any changes to your business practices as they could be seen as unethical unless you’re using the same criteria as the public. Take your time, begin the process and quantify tangible, real data because social media never forgets.
But in the meantime, get ahead of the competition by leading with Verified Emission Reductions (VERs) for voluntary climate action.
What is the impact of ESG Metrics?
There are mixed opinions when it comes to the impact of ESG metrics. Some people think that these metrics will help companies to make better decisions and allow them to meet public expectations while others feel as though the information provided doesn’t give a good overall picture. But what we do know for sure is that that what was “acceptable” at the beginning of this year is no longer viable. The scrutiny around sustainability for every business in every country in the world is now front and center. The next few years will determine who is sustainable and who is gone. But don’t panic, because there are ways to get ahead of the curve.
This is an important factor to consider when you are measuring ESG Metrics. Your decision will now have an impact that that is different than it was 6 months ago. For example, a change in how often you recycle can make a big difference. It is quantifiable. If it reduces the cost of your operations and also helps to protect the environment, it can be used in your marketing efforts. Tick the box!
It’s clear that ESG metrics are leading to increased debate across many industries and businesses because the pandemic and the invasion of the Ukraine have increased the pressure on the need to shift to a circular economy. We were already headed in that direction, but things are moving a lot faster now. The key takeaway is that it is important to begin quantifying your risk and materiality.
The key actions to remember when assessing a company’s ESG metrics are to:
- Take your time and get it right
- Measure yourself against other companies in your industry/geography
- Use reliable sources of data when compiling your data sets
- Be holistic in your approach (environmental, social and governance)
- Do not exaggerate the data (greenwashing)
- Be methodical as opposed to reactionary
How are ESG metrics calculated?
Some of the common calculating methods use a point system in order to determine which companies rank well- for example, firms may rate everything from efficiency in their operations to how much they pay employees. when it comes to social issues. You can then add up these scores and compare them against other businesses within the industry or region that you work in.
When measuring ESG metrics companies will need to quantify:
- Environmental: Greenhouse gas emissions, water consumption, energy use
- Social: Employee satisfaction, supplier diversity, customer satisfaction
- Governance: Board diversity, executive compensation, ethical practices
There are pros and cons when it comes to evaluating companies in this way- on the one hand, it can help you to identify whether or not you’re doing a good job and will meet public expectations. On the other hand, if you don’t have a full picture of what consumers/stakeholders and partners are looking for, then it’s possible that you’ll be making changes for the sake of improving your business rather than because they’ll help the environment or the company stakeholders.
Each company will have different ESG priorities based on company size, industry and location. But some general best practices for using ESG metrics include:
1. Set sustainability goals: Create specific, measurable and achievable goals that are aligned with your company’s values.
2. Collect data: Use data to track progress and identify areas of improvement.
3. Communicate progress: Share your results with stakeholders to build trust and transparency.
4. Take action: Use the insights from your ESG metrics to make data-driven decisions that will improve your environmental and social performance.
By following these best practices, companies can use ESG metrics to make data-driven decisions that will improve your bottom line and build trust with stakeholders.
This means that it’s important to think carefully about what you want to achieve before you start comparing your business against others in this way. For example, if you’re looking to improve public perceptions then making changes based on these scores would be a good idea. If you’re trying to make your business more efficient so that you can reduce costs and reduce risk, then this information would also be as useful. It’s a win-win-win. People, planet, profit. The time is now, and since you’re reading this article then you are headed in the right direction and you are likely ahead of your competitors. Congratulations! Keep going.
What are ESG indicators?
“Indicator” in an ESG report refers to the factors that are used to measure performance and give an overall rating of the company. Some companies use all of these indicators, others use a few and some don’t use any at all. But it is only a matter of time before consumers, partners and stakeholders come looking for this information. Keep in mind that the indicators that you quantify will affect your company’s ESG or sustainability score as compared to other similar companies in your industry and location. These can be positive (the more you do positively, the higher your score) or negative (the less you do, the lower your score.)
ESG Metrics FAQ
What does ESG stand for?
ESG stands for Environmental, Social, and Governance. These three factors are meant to be evaluated when making decisions for companies.
What is the goal of ESG Metrics?
ESG metrics aim to help businesses measure their environmental, social and governance performance in order for them to be transparent with consumers and stakeholders.
Who are the stakeholders that ESG Metrics impact?
ESG metrics impact companies, their stakeholders, public perception of said company, potential investment and employees/management of said company.
What is an ESG Matrix?
An ESG matrix is a table documenting sustainable activities which helps companies measure their environmental, social and governance performance. t provides transparency, it clearly outlines risks (materialities) and defines the opportunities and goals that the company aims to achieve.
What is the purpose of ESG Metrics?
ESG metrics allow businesses to measure their environmental, social and governance performance in order for them to be transparent with consumers and stakeholders. This information can help companies make better decisions about their business practices.
What does governance mean in ESG?
Governance is the legal, compliance and ethical business practices of an organization. It is the process by which companies are directed, monitored and controlled. A strong system of governance makes a company more stable and reduces the risk for stakeholders, customers and employees.
What are governance factors in ESG?
The specific factors that are affected by Governance include: Board and Executive Leadership, Strategy and Planning, Risk Management, Compliance and Ethics Programs, Talent Management and Communication to name a few.
How are ESG metrics calculated?
The metrics are calculated by scoring companies on a scale of 1-100. The higher the number, the better they rate in that category. These metrics are compared to other companies in the same industry and geographical areas of operation. But there is more.
Who measures ESG scores?
With the pandemic and the invasion of the Ukraine, the whole world is now using ESG scores to measure the sustainability of companies. There are a considerable number of companies who are vetted and capable of performing these tasks with easy to use Saas platforms that will help. Some accounting firms are also qualified to collate this information and who provide ESG Assurance. They may also be ESG consultants or companies who specialize in this field.
How many ESG reporting frameworks are there?
There are two primary reporting frameworks, one is referred to as GRI and the other being ISO. But there are many different frameworks based on those two which use different indicators and metrics to measure ESG.
What is the difference between GRI and ISO?
While both frameworks follow similar principles, ISO focuses on transparency in management while GRI focuses on the impacts of business operations. There are many differences between these two ways of measuring ESG and most organizations use a combination of both reporting methods.
What is the Global Reporting Initiative?
The Global Reporting Initiative or GRI is a framework that was developed in 1997 by Nicolas Hulot. This framework has been adopted by multiple countries for reporting purposes. The focus of this framework is on environmental impacts, including climate change, water security and biodiversity.
The GRI has a few different types of reports:
1. Sustainability Reports: A report on an organization’s economic, environmental, and social performance
2. Integrated Reports: A report that combines financial and sustainability information
3. Climate Change Reports: A report on an organization’s greenhouse gas emissions
4. Water Security Reports: A report on an organization’s water use and management
5. Biodiversity Reports: A report on an organization’s impact on biodiversity
The GRI framework is voluntary, but it is the most widely used reporting framework in the world. Over 2,500 organizations have adopted the GRI framework, including companies like Coca-Cola, Nike, and Walmart.
What is ESG World Economic Forum?
The World Economic Forum is a Swiss nonprofit foundation with a mission to improve the state of the world. They work to bring leaders from all backgrounds together to create sustainable solutions for the future by sharing knowledge, forging partnerships and encouraging best practices.
In conclusion on sustainability accounting standards board
To summarize this article, the time for collecting your metrics on sustainability is now. We have outlined that ESG metrics are measurements of environmental, social and governance performance that companies use to create transparency with their stakeholders.
There are multiple frameworks for measuring ESG like the GRI framework and the ISO framework. The Global Reporting Initiative is an example of one of these frameworks. Furthermore, there are many organizations who measure ESG scores like the World Economic Forum, but the important point is that it is time for companies to be more transparent. This will build trust with consumers and stakeholders which will help make better business decisions. Businesses should also continue to work towards creating a sustainable planet for the future generations.
You may also want to read What is SDG and ESG?
Caveats, disclaimers, ESG factors and corporate governance
At ESG | The Report, we believe that we can help make the world a more sustainable place through the power of education. We have covered many topics in this article and want to be clear that any reference to, or mention of the social responsibility of sustainable investing or stakeholder capitalism, executive compensation, animal welfare, or the primary role of board diversity and shareholder rights in the context of this article is purely for informational purposes and not to be misconstrued as investment or any other legal advice or an endorsement of any particular company or service. We highly recommend that investors use a financial advisor, certified financial planner or investment professional before entering the markets.
Thank you for reading, and we hope that you found this article useful in your quest to understand ESG and sustainable business practices. We look forward to building a sustainable world with you.
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