Business practices and goals now influence consumer behaviour and decisions. Consumers would hold off on purchasing a product or service if they find out that a company is not up to their standards. These standards are fundamentally relevant in the environmental and social sectors and have gradually intersected with a business’s sustainability disclosures.
Recently, annual and quarterly reporting for investors involves financial and non-financial reports, such as business practices that impact the environment and specific communities and how governing bodies provide solutions to these impacts. Investors give importance, relevance and traction to these non-financial reports more than financial reports and factor them into a company’s longevity. Investors also look for long-term action plans within a company’s mission, vision and goals and ensure that they follow through with these declarations.
This paradigm shift in how companies approach sustainability is called ESG or Environment, Sustainability and Governance. These three pillars comprise a framework that is the basis for the aforementioned non-financial reportings and now guides a business’ strategy, directions and practices.
Whilst ESG is now a business imperative, its relatively recent emergence makes it challenging to compare performance between companies. Yearly comparisons of ESG reports within the company are also tricky compared to profitability reports due to a lack of gauges or simply because companies cannot pinpoint what they’re supposed to measure. In this blog, we look at measuring ESG sustainability, why ESG reporting is crucial and what entails good performance.
Does ESG Performance Matter?
ESG is a sustainability framework that revolves around three central factors from which it derives its name: Environment, Social and Governance. Each of these three factors covers certain aspects, which serve as the goals and variables for performance measurement.
- Environmental—These considerations include carbon emissions, climate change, energy wastage and efficiency, biodiversity protection, pollution, deforestation and waste management. These aspects show how a company values environmental sustainability practices and works towards minimising its impact.
- Social—The social considerations include inclusivity and diversity, community involvement, employee engagement, customer satisfaction, labour rights, data protection and privacy, human rights and relations and ethics. Companies that engage and socially involve themselves in empowering communities and performing moral obligations have good ESG standings.
- Governance—These aspects include executive diversity and inclusivity, anti-corruption measures, political contributions, executive compensations, organisational structures, leadership training and workshops and shareholder rights. Good governance rests on reliable regulation systems and high moral standards that promote proper company practices and procedures.
These considerations are relevant from a consumer and investor standpoint and indicate business resilience. It shows that a company recognises the risks and impacts it contributes to the longevity of society and the environment. These ESG performance measurements can impact a company’s profitability and reputation and are sometimes a deciding factor for a company’s downfall or expansion.
ESG Performance vs. Non-ESG
Due to the number of considerations in ESG, measuring ESG performance between companies takes a lot of work. Different locations may have different standards and values that need more fitting for comparison. Also, multiple ESG sustainability standard boards have different metrics for a particular variable, and converting one measure to another takes time and effort.
For example, countries have different acceptable carbon emission values. A company looking to expand or invest may find its carbon emission values good in one country but risky in others. This dissonance in performance metrics can confuse companies because there still needs to be a global standard to measure ESG performance.
However, a few reputable standard boards act parallel to the Financial Accounting Standards Board and help define requirements and measurements to create consistency when making ESG reports. Here are a few of them for reference:
- Global Reporting Initiative
- Carbon Disclosure Project
- Climate Disclosure Standards Board
- International Integrated Reporting Council
- Sustainability Accounting Standards Board
- Task Force on Climate-Related Financial Disclosures
Whilst non-ESG performance is quantifiable, such as profitability and supply projections, some ESG performance variables are hard to quantify. Some companies will provide text disclosures that indicate whether they’re engaged in a particular activity. Or they will mention that they have standards and regulations in place without bothering to collect raw data. These actions can prove to be an unreliable measure of ESG performance, and investors won’t be able to see if companies adhere to standards.
How to Measure ESG Performance
Due to certain aspects of ESG lacking raw data, keeping tabs on what entails an excellent ESG performance is a complex undertaking. Here are a few steps your company can take to correctly measure ESG and improve your reporting to convince investors and consumers alike of your good ESG standing.
- Improve Data Collection—A company must collect raw data, improve upon it and use analytics to enhance reporting. This requires creativity and the use of basic information to measure ESG. Suppose a law firm wants to measure carbon emissions and alternative energy use. They can use data from company car usage, calculate mileage or project a reduction of fossil fuel use by purchasing hybrid or electric cars.
- Sector-Specific ESG Topics—Not all aspects of ESG apply to a particular company. Companies can choose not to measure considerations with the lowest ESG impact and instead focus on the sector’s relevant ESG impacts. For example, Nestle put its sustainability focus on changing packaging to environmentally friendly materials and has slowly moved on to other aspects, such as community involvement and renewable energy usage.
- Sector Benchmarking—When comparing data measurement performances, a company should only focus on its sector and avoid comparing its ESG performance with a different industry. This provides you with a reasonable assessment of where your company ranks in ESG and who the leaders are in the industry.
- Stakeholder-Specific Factors—Since the three central factors are practically different in scope and focus, it’s best to treat them separately and measure each element according to category. Define and identify each stakeholder correctly; that way, it would be easier to measure their impact on each factor and assign them accordingly.
Scoring Methods—Like any measure, a reliable scoring method is essential to provide actual performance and pinpoint which factors require immediate action. Companies should also recognise which aspect has greater weight on the ESG impact scale and provide individual scores according to significance and importance. An overall ESG score is required, but each factor should be individually scored with relevant data to measure performance truly.
How Madison Marcus Can Help You
Good performance for an ESG-compliant company doesn’t rely on the overall scores alone but on the visible positive changes and impacts on the environmental, social and governance aspects. Investors may look at the numbers, but without visual proof, your ESG performance may suffer greatly, and it may only come off as your company performing ESG for compliance alone. After all, actions do speak louder than words, and this has to reflect on your company’s overall commitment.
Do you have enquiries about ESG and would like to consult experts in the field? Marcus Madison can provide an expert outlook and strategies for your ESG needs. For all enquiries, contact us here.