How To Measure Corporate ESG Performance
As an investor, measuring a publicly traded company’s ESG performance is tricky. There is more to it than setting a goal, an objective, and then monitoring a few key performance indicators. Treating ESG measurements as simple boxes to be checked robs companies of potentially performing more, and for investors to not expand their view on what the company is working towards.
Measurements need to be more meaningful and with ESG regulation being a new concept, the onus is on investors and companies to blend ESG into business strategy and investing. This is reflected in how investors should evaluate companies' ESG performances.
Start With Corporate Reports
Right from the start, any company that is committed to ESG initiatives is going to be publishing realistic goals along with commensurate progress towards those goals. These will be outlined in periodic reports. If they’re inconsistent then that is a problem.
Beyond that, not all of these reports are created equal. Companies that have reports following ESG standard reporting inspire more confidence amongst investors. The reason is that ESG reporting standards have been set by the Global Reporting Initiative (GRI) and the United Nations Principles for Responsible Investment (PRI).
Featured Article: ESG Ratings: A Benchmark For Performance
Check Third-Party Sources
From there, you can validate any and all sustainability reports using third-party tools. Some sites that you can use are MSCI ESG Ratings or Sustainalytics ESG Ratings.
For any employee-related issues specifically, you can find employee reviews on websites like Glassdoor.com.
Pay More Attention To The Big Ticket ESG Results
Once you have verified the reliability of those reports, you can then focus on the specific companies' “big ticket ESG results” and define them. Even though ESG is broken into three sections, there are many subcategories to those aspects.
And naturally, not every company is going to prioritise all of those initiatives. In fact, it would become trivial if every company was working toward every ESG objective there is. Realistically, a company should be aiming for three ESG goals - one in each category ideally. And you’ll be able to figure that out quickly based on their reporting and their objectives.
The other thing to note is that these ESG goals and results need to reflect the industry that the company is in. For example:
A digital service organisation is going to have little impact on the environment, but they’ll have a higher impact on society via data security.
A nature centre is going to have a higher impact on the environment and society, but have little to no impact on governance.
Banks might not have any impact on the environment or society, but massively influence governance.
The idea is to generally understand the industry you’re delving into and figure out how the industry melds with ESG. For example, if a cybersecurity firm has overly ambitious governance and environmental goals, with adequate goals in society, then that might be a cause for concern.
Even in the event where the company does make an impact on all three areas, it’s important to understand where the company is prioritising. Not to mention how they are addressing each area. You might need to look at those companies with more scrutiny to verify if their performance is enough for you.
Understand Their Gaps
One of the recommendations we make to companies when creating ESG policies is to do a gap analysis. As an investor, you’ll want to do something similar. The idea of a gap analysis is to identify where there are gaps.
Some examples of potential gaps can be where transparency for more data is going to develop, what the shape of the industry is like in terms of competitiveness.
With a gap analysis companies have to predict what might be obstacles to their objectives, both internally and externally. For investors, it’s important to know about external factors.You especially want to pay attention to the governance part as these often are behind the scenes. It’s tricky for a company to even outline how decisions are made, what the structure of the business is like or how they can communicate to an external audience the purpose of their board or how the CEO is involved.
By following these steps, you should be able to tell how committed a company is to its ESG performance objectives by how well they can provide transparency in those specific areas.
For updated information on a growing roster of global company ESG performance, bookmark ESG Company Profiles.