What Is ESG Performance And How To Measure It?
ESG matters to consumers, business leaders, employees, investors and communities alike. But unlike profitability, comparing ESG between companies or over time within a company is hard. By using the right ESG data you can establish and grow your company as an ESG leader. Measuring your company’s ESG performance will reduce costs, enhance your brand, get investor and customer buy-in, ensure compliance and help with strategy development.
What is ESG Performance?
First, we need to define what we mean by measuring ESG performance as there can be many interpretations. Each company will prioritise different aspects of environmental, social and governance issues based on their values or fit. Measuring ESG performance is hard as some actions can’t be quantified (reducing pollution for example). But there are ways to measure ESG. Common ESG metrics examples are greenhouse gas emissions, diversity percentages, and tax payments, which help quantify a company's ESG approach and track its sustainability progress.
ESG stands for environmental, social, and governance values. ESG performance measures how well a company upholds these values. Investors use this to make decisions and for comparison. Meanwhile, customers and employees use ESG performance to check if a brand is committed to its values before engaging with it. ESG metrics are specific measures for each part of ESG—environmental, social, and governance—that show how important these metrics are for evaluating ESG initiatives.
Investors use three ways to compare ESG ratings:
Compare to peers who manage similar portfolios.
Use a standard industry benchmark index.
Use their own historical and internal data.
Each approach has its own limitations and suitability depends on many factors such as the level of risk in the portfolio, stakeholder composition and fiduciary duties. And comparing ESG performance is not straightforward as there can be big variations in ESG ratings across industries, companies and metrics.
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Why ESG Performance Matters
The numbers say ESG matters and can’t be ignored.
A recent survey shows that 83% of consumers think companies should adopt ESG best practices. 91% of business leaders think they have a responsibility to address ESG issues. 86% of employees want to work for a company that shares their views on those issues. So if we see the foundation of any company’s success as the people who make up the company then ESG in some form is the direction companies need to head to find growth paths that fit a changing world.
Transparency and accountability in reporting a company’s ESG initiatives is key to building trust and living those values.
The numbers show that when it comes to making purchasing decisions, consumers between 17-38 are twice as likely to consider ESG issues as older consumers. This isn’t just about personal opinions or feelings.
Investor attention has been drawn to ESG because assets managed by ESG funds more than doubled between 2017 and 2020. This is happening in activist funds, which buy the entire market and use shareholder votes to push for ESG issues, and in passive funds, which follow ESG indexes. Companies that prioritise financial indicators should also be aware of how ESG impacts their ability to raise funds and make sales.
Why Measure ESG Performance
Let’s start with the benefits of ESG measurement before we get into the how:
ESG measurement and reporting can reduce a company’s operational costs. More data means more transparency and opportunity to improve.
ESG performance metrics help to quantify progress towards ESG goals and accountability.
Good for a company’s brand at local and global levels.
Useful for companies seeking support from their investors and customers.
Compliance with many regulations and policies requires ESG assessment and reporting.
Measuring a company’s ESG performance helps to develop long-term plans and prevent short-termism.
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How to Measure ESG
There is no one-size-fits-all to a company’s ESG initiatives. To measure ESG, both quantitative and qualitative metrics are used and each industry is different. Here are the steps to measure ESG.
It's crucial to integrate ESG into business decisions, considering risk management, financial performance, and environmental impact. This may involve adapting current procedures and frameworks, as well as engaging key stakeholders through ESG education and training.
Step 1: Identify the key performance indicators (KPIs) relevant to your company using industry-specific frameworks like the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). These could be things like employee compensation, diversity on your board of directors or greenhouse gas emissions.
Step 2: Get data on your company’s performance from financial reports, supplier reports and industry benchmarks.
Step 3: Review and assess the company’s trends, strengths and weaknesses by looking at the data. It may be helpful to compare with similar companies or sustainability standards like GRI or SASB.
Step 4: Publish the ESG results on the website or share them with relevant stakeholders.
Finally to improve the performance use the insights to develop a plan to address the weaknesses. This should include setting ESG targets and goals, with key performance indicators (KPIs) to measure progress and implement new policies and practices.
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ESG Measurement Tools
ESG measurement tools are essential for evaluating the sustainability of a company or investment portfolio. They offer stakeholders, investors, and other parties a detailed look at the company's ESG performance. By employing these tools, one can assess the company against established metrics.
These metrics fall into two categories: quantitative metrics and qualitative ESG metrics. Quantitative metrics are based on numerical data that can be measured and compared, such as greenhouse gas emissions, energy usage, employee turnover rates and reported HR breaches. Qualitative ESG metrics are based on non-numerical data that are more subjective and require interpretation.
ESG Ratings: Specialised rating agencies collect data from companies to assess their ethical practices and provide ratings. MSCI is a common ESG rating system, along with FTSE, ISS, Sustainalytics and many others.
ESG Indexes: Stock indexes track companies that meet certain ESG criteria.
ESG Audits: Hire a third-party firm to conduct an audit, which can help you understand the many ESG factors and make better decisions.
ESG Questionnaires and Surveys: When making investments, it is normal practice to ask companies to fill out ESG questionnaires or surveys regarding their practices and strategies. These questionnaires must be comprehensive to ensure well-informed decision-making.
ESG Software Platforms: Companies have various digital tools to track and measure different ESG metrics. These tools can also help benchmark against industry peers, identify areas for improvement and create sustainability reports and disclosures.
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ESG Performance Drawbacks To Avoid
To improve integrating ESG considerations and their values within the portfolio, firms should adopt a "zoom in, zoom out" approach. This involves focusing on the specifics, such as concentration, tracking errors, and risk, while remaining mindful of the big picture.
Firms can improve their risk frameworks regarding ESG threats and failures by both zooming in and zooming out. Zooming in helps highlight specific threats and failures while zooming out provides insight into underlying processes and bigger-picture strategies and opportunities. Neglecting either perspective can result in missed opportunities for improving performance in PE/VC investments.
Finally, it is crucial to have a reliable and consistent data source for ESG benchmarks and metrics. This will provide you with accurate and trustworthy information, as well as transparent reports for investors. Ensuring a single source of truth is important to effectively measure ESG performance.
ESG Performance Pitfalls To Avoid
To integrate ESG factors and their values into the portfolio, firms should adopt a “zoom in, zoom out” approach. This means focusing on the details, such as concentration, tracking error and risk while keeping an eye on the big picture.
Companies can strengthen their risk frameworks by analysing individual ESG risks and failures, as well as larger plans and opportunities. To give accurate and transparent information to investors, ESG benchmarks and metrics must be based on a credible data source.
Conclusion
As the world deals with climate change, social inequality and business ethics companies that put ESG at the heart of their strategy will win in the short term simply because they will be reporting more data and therefore identifying areas to improve. By doing this companies can create long-term value for themselves and their stakeholders and contribute to a more sustainable and fair society which is what markets reward in terms of public visibility into company practices and brand recognition.
Yes, improving ESG performance is a complex task that involves many strategies and challenges. Change and adaptation to changing circumstances is normal in any business that wants to evolve in a healthy way. ESG metrics are key to this process and collaboration is required to succeed in this global corporate sustainability assessment.
Compare company ESG performance via ESG ratings, available at our Company ESG Profiles page.
Frequently Asked Questions (FAQs)
How is ESG performance measured?
ESG performance is measured using both quantitative and qualitative indicators. Qualitative metrics are based on non-numerical data such as a company’s commitment to diversity, labour practices and impact on local communities. These indicators may include metrics such as carbon emissions, water usage, employee turnover rates, board diversity, executive compensation and more.
What are ESG indicators?
ESG indicators are metrics used to measure a company’s environmental, social and governance performance. These can include quantitative and qualitative metrics such as greenhouse gas emissions, employee turnover rates, board diversity, executive compensation, community engagement and more.
Why is ESG performance important?
Companies and investors are putting more emphasis on ESG performance. If a company has good ESG performance it’s seen as more responsible and sustainable. This in turn means more investors and customers will be attracted to the company. Investors also want to invest in companies that align with their values and those that have strong ESG performance as they will perform better over the long term.
How do I improve my ESG performance?
Improve your ESG performance by taking a holistic approach that considers how business decisions impact the environment, society and governance. To achieve ESG goals set clear goals and policies. Conduct regular ESG assessments to identify areas to improve. Engage with stakeholders to understand their interests and preferences. Invest in sustainable technologies and practices. Diversify your workforce. Be transparent about ESG performance and take ownership.
What are the 4 ESG metrics pillars?
The 4 ESG metrics pillars cover different aspects of a company’s impact. The environmental pillar looks at carbon emissions, waste management, water usage and energy consumption. The social pillar looks at labour practices, human rights, employee health and safety, community engagement and diversity and inclusion how a company impacts its stakeholders.
The governance pillar is about a company’s governance structure and practices, including board diversity, ethical business practices, executive compensation and shareholder rights. The financial pillar is about a company’s financial performance, including revenue growth, profit margins and return on investment.
