ESG Metrics – Another Look

Corporate ESG (Environmental, Social, and Business Governance) efforts require regular impact assessments to track improvements and benchmark performance against other companies in their industry.  Utilizing objective metrics allows evaluation of a company’s sustainability and social impact efforts. These metrics have become increasingly important for investors, customers and other stakeholders who are concerned about the long-term health, risk profile and stability of the companies they support.

Presently there are multiple, continuously changing ESG frameworks that incorporate different performance indicators. Each independent ESG score provider has their own weighted algorithm. Management and other stakeholders can customize these ESG evaluations based upon their relevance to their specific industry and fiscal goals.   

The most utilized metrics categories are those that focus on Greenhouse Gas (GHG) emissions and the use of natural resources (both within the “E”); diversity and inclusion (considered in the “S” and in the “G” depending on the stakeholder they refer to); supply chain management, and the existence of ethics and anti-corruption policies (subscribed under “G”).

1. GHG Emissions: Carbon and other greenhouse gas emissions are a key factor in climate change.  Investors and customers increasingly prefer companies that commit to reduce their carbon footprint. By tracking GHG emissions and setting goals around them, companies can identify areas for improvement and reduce their environmental impact.
2. Natural resources consumption: This group of metrics include the usage of energy, water, and nature (space, biodiversity, and impact on the ecosystems). Understanding where these resources come from, and the amounts used, enables companies to foresee opportunities to reduce consumption and move towards cleaner technologies.  
3. Diversity and Inclusion: Metrics on diversity and inclusion are critical to assess the company’s workforce environment which directly impacts hiring/retention and other labor costs. Much of this information is usually in hand, including employee men/women ratio, minority and gender representation in executive/managerial roles, age representation, board composition, percentage of employees with disability and other such demographic data. 
4. Supply Chain ESG: The environmental footprint and social impact of a company goes beyond the goods and services it produces. Monitoring their own supply chain ESG metrics forces the company to track how its supply chain operates, where materials come from, and who is participating in their production. Companies that demand ethical, environmentally friendly and socially responsible practices from their suppliers, protect themselves from potential legal, reputational and other risks.  
5. Ethics and anti-corruption policies:  Most companies have these policies in place. The issue is compliance. Regular internal assessments can reduce risk management costs and legal exposure.

Fashioning the specific parameters to accurately assess corporate ESG efforts remains challenging. Companies are not uniform entities and even those within a specific industry can vary widely in their management structure, style and strategic goals. Customizing ESG assessments is vital to provide accurate and actionable information that will benefit both the company and society. This requires the identification of focused and reproducible metrics within the broad categories outlined above.