ESG (environmental, social and governance) reporting is more than a public relations play. Strategic integration of ESG factors can and should link to business performance, just as it does societal impact. However, vague ESG goals must evolve into defined metrics that align business goals with community needs. This requires developing ESG metrics that prove ROI and ensure initiatives deliver shared value. With metrics tying ESG to financial and social returns, you gain the visibility needed to double down on what works while pivoting ineffective efforts.
ESG Metrics: Environmental, Social and Governance
ESG standards are made up of three areas—environmental, social and governance—that metrics can track against. The data captured by these metrics can be incorporated into reports to help stakeholders make sound investments for the company’s current operations and future expectations.
ESG Environmental Metrics
For finance functions, ESG environmental metrics can help you track how your green initiatives impact the efficiency or costs of your operations. There are many ESG initiatives that companies target, including:
- Pollution: emissions and waste
- Efficiency: water and energy usage
- Materials: product sustainability and ethical sourcing
- Encroachment: impact of building and expansion
Create initiatives that have long-term impacts on environmental sustainability and provide long-term benefits to your business so that initiatives are likely to stick.
- Can a greener supply chain via recycling or reusing deliver margin gains?
- Can building LEED certified facilities improve asset value?
With so many prominent discussions around climate change, there are plenty of examples of environmental metrics that companies use today.
ESG in Action: Percent of Renewable Energy
A real-world example of ESG in action is Amazon’s climate pledge, which aims to power its operations with 100 percent renewable energy before 2030. The company’s investments in electric vehicles, sustainable building materials and reduced carbon emissions serve to both help the environment and also improve delivery fleet efficiency, lower operating costs and fulfillment expenses and provide many more measurable financial benefits. By consistently measuring the percent of renewable energy used in production, a company can gauge both environmental impact and in-depth business efficiency.
Social Metrics
ESG social metrics encompass both the rights of your employees and the community that’s served. That includes:
- Providing fair employee salaries
- Ethical hiring practices
- Employee health and safety
- Learning and training programs
- Fair labor practices (i.e., diversity, equity and inclusion)
- Community and philanthropic programs
Employees that feel represented, safe and supported can reduce the costs of turnover or poor productivity. Metrics like employee retention or satisfaction can, therefore, directly align with business performance objectives. And for industries with more work-related injury or health concerns, measuring these incidences is both good for the workforce and to understand the material impact of these incidences on the business.
ESG in Action: Number of Local Jobs Added
Consider the example of Home Depot’s Path to Pro program, which helps members of local communities learn trades skills and provide services to Home Depot Pro customers who are in need of skilled labor for professional projects. Home Depot tracks the number of local jobs that its program fills, giving insights into the impact on local communities while also streamlining expert labor to its customers for long-term sustainability.
Governance Metrics
ESG governance metrics deal with leadership oversight and company transparency. Transparency can impact both customer and employee experience, with consequences that impact everything from brand value to taxes.
This area of the ESG framework can include:
- Company’s corporate structure and management
- Executive pay
- Board composition
- Investor goals
- Compliance standards.
This framework covers the backbone of the company by assessing company policies, performance, risks and even data security, which also has social implications.
ESG metrics around governance can help you track the impact of cybersecurity measures based on the number of costly data breaches, the ratio of executive to employee salaries or even the percentage of independent members on the board.
ESG in Action: Percent of Independent Board Members
It’s not uncommon for businesses to measure board diversity. Wells Fargo, as one of many examples, reports annually on the number of independent board members, women board members and members with certain ESG qualifications. These metrics can signal trust to investors and stakeholders in a board that is accountable and exhibits diverse experiences for stronger decision making.
Key Steps for Developing ESG Metrics
When developing KPIs and their associated metrics, it’s most important that you have a clear goal and reasonable means for collecting data and measuring performance.
Consider these five steps for determining your ESG metrics and the goals that they support:
- Materiality assessments: Materiality assessment allows you to focus on the specific areas that undergo ESG measurement. Some companies may focus on every environmental, social and governance aspect while others only focus on one or two topics at a time. Work with stakeholders to understand what they perceive as the largest risks or opportunities for your business.
- Standards adoptions: There are several standards that you may adopt that will provide guidance on how to perform your ESG metrics. Some of these standards include the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). They provide important information on industry-specific or universal issues that are relevant to a company’s investors, as well as guidance on data collection and reporting content and disclosures.
- Metric benchmarking: To understand whether your company is on track to reaching ESG goals, you need to see what your peers and the industry are doing. Benchmarking peer and industry metrics creates a baseline that you can use to measure improvements and risks made in your company.
- Stakeholder involvement: With stakeholders having such a large role in the company’s management and growth, you need them involved in every step of the ESG process. Bring in both internal and external stakeholders by providing accurate reports, clear communication and in-person meetings.
- Data collection: A major part of ESG reporting involves gathering data to determine performance and identify risks. Work with different departments to understand how you can integrate and automate data collection from relevant parties to continuously track ESG metrics against your goals.
Important Ethical Considerations in ESG
Transparency is the cornerstone of an ethical ESG initiative. Ensure that your ESG metrics do not misrepresent sustainability efforts, cherry pick the best data or create risk elsewhere in the business or community. Though investors and businesses are more likely to commit to initiatives that also help profitability, ESG should also have a true ethical obligation and benefit to society.
Develop an ESG Framework for Your Business
To create the right metrics, you need to understand what areas need improvement and how to work with the data you have at your hands.
Paro’s fractional finance experts, from accountants to analysts and CFOs, offer extensive experience in building KPIs, reporting and visualizing performance data and using their industry-specific knowledge to implement and measure successful initiatives. Match with the top experts from a highly-vetted network and start making strides towards your ESG goals.
