Metrics to include in your ESG goals & strategies
Metrics to include in your ESG goals & strategies
As shown by numerous studies, it is becoming increasingly clear that strong ESG metrics and strategy go hand in hand with strong financial performance. Though ESG was once thought to be in opposition to financial performance, studies from a wide range of think tanks and academic institutions such as the Financial Analyst Journal study in 2019 showed that companies with high material ESG scores financially outperformed companies with low material ESG scores between 2013 and 2017. Bank of America Merrill Lynch’s Global Research team found that 15 of 17 companies that went bankrupt between 2005 to 2015 had poor ESG scores five years leading up to their bankruptcy. In their research, companies with lower ESG scores had higher borrowing costs as well, around 2% higher on average.
The correlation between ESG and financial performance may have to do with long-term thinking. Consider times in your personal life where saving money has helped you through an unexpected hardship or stretching before exercising prevented or at least lessened an injury. Often, ESG-focused capital expenditures focus on generating long-term value and reducing risk over the full lifespan of an investment. This creates long-term resilience.
In his annual letter to CEOs, BlackRock CEO Larry Fink mentioned climate change ten times as he stressed that ESG disclosure “should be a means to achieving a more sustainable and inclusive capitalism.” According to Fink, disclosure is not a nice-to-have or a responsibility; rather, it is an economic imperative. This is especially true as millennials, America’s largest population cohort, increasingly look to spend and invest their money in socially responsible companies.
In order to effectively establish and disclose ESG strategies and performance, regularly tracking key metrics is crucial. One of the challenges of this has been that there is no definitive universal set of ESG metrics. As investor demand for disclosure has grown alongside a shifting political climate, a future with standardized ESG metrics is becoming increasingly likely. One model put forward by the UN is the Value Driver Model, which helps companies assess and communicate the impact of sustainability-advantaged products, initiatives, and risk exposure and integrate them with performance metrics.
What metrics should your organization be tracking, whether for your own purposes or at the request of investors? It’s important to consider each aspect of ESG: Environmental, Social, and Governance. Here’s a list of several recommended metrics to track for each:
1. Carbon footprint: What is your quantitative impact on climate change and global warming? A carbon footprint is the total greenhouse gas (GHG) emissions caused by an individual, event, organization, service, or product, expressed as carbon dioxide equivalent. This aggregates emissions from all stages of a product or services lifecycle (production, manufacturing, use, etc.).
2. GHG emissions: GHG (short for greenhouse gas) are gases that trap heat in the atmosphere, most commonly water vapor (H2O), carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and ozone (O3). This is typically measured in Carbon Dioxide equivalents (CO2e) when calculating Global Warming Potential (GWP).
3. Year-over-year energy, water, waste variance: Total or per-unit usage for energy use (kWh or J), water use (liters or gallons), or waste diversion (lbs or kg) brought about your company’s operations changes from one year to the next. Is your resource consumption increasing or decreasing from year to year?
4. Regulatory requirements (reactive and proactive): Understanding and complying with requirements of current regulations and preparing for future laws and regulations that could include things like hazardous waste removal, emission limits or type of emissions, municipality reporting, and more.
5. Resilience: Resilience is a measure of how well a business is prepared for potentially disruptive events and changing conditions, including but not limited to physical risks such as earthquake-proofing or features designed to combat negative effects from long-term risks like climate change.
- Market transition resilience: A subset of resilience is preparedness for regulatory shifts, energy market shifts, or other market shifts that broadly impact your industry.
- Development resilience: Any resilient new construction should pay particular attention to the land selection and exposure to potentially extreme weather events, biodiversity considerations in the regional ecosystem, or any brownfield redevelopment. Does your company have policies in place to evaluate these factors?
6. Materials & supply: Material sourcing and disposal in an ethical and sustainable way. An example of this is sourcing wood products with an FSC certification, which ensures products come from sustainably managed forests. You will also want to track the carbon footprints of materials in your supply chain and ensure that you are sourcing from ethical suppliers that provide safe working environments for their employees and do not use child labor, for example.
1. Stakeholder engagement: How does your business engage recurring or “set” stakeholders, such as community, employee, investors, operators, suppliers, and more? Do you have a clear process in place for including key stakeholders in critical business decisions? Is there a process to understand the impacts these have on these stakeholders?
2. Health & wellbeing: In the built environment, it’s important to know how “healthy” or livable your building and operations are for stakeholders. As humans spend the majority of their lives indoors, measuring the health and wellness impact of your operations on your stakeholders is crucial. Indoor air quality is a critical component of this. Other health factors to assess include access to natural light, healthy nutrition availability, opportunities for exercise or physical movement, and green spaces. WELL and Fitwel are two certifications that help to assess and recognize high-performance along these factors.
- Community impact: In the same way buildings and operations must be resilient and work with, as opposed to against, the environment, they should also work with the community. Is your company involved in community organizations? How do your operations affect the people that live nearby from community health, environmental, and economical perspectives?
- Pandemic preparedness & impact: A year ago this would have seemed like an afterthought; however being prepared for a pandemic and understanding potential impacts is now unavoidable. The COVID-19 pandemic speaks to the business needs for resilience, long-term planning, and widespread adoption of ESG principles and operations.
1. Cybersecurity & safety: Your employees should feel safe and secure at work. Is your building equipped with security that will protect them from potential threats? In terms of cyber security, is your company information secure both in your offices and on employee laptops in work from home scenarios?
2. Employee benefits: Healthcare, parental leave, work from home flexibility, and other policies that benefit your employees are important to invest in, as they help improve employee retention and bolster your organization’s reputation.
3. Executive compensation & makeup: Is your board and executive team diversely represented? Accordingly, is your executive compensation fair and aligned with positive outcomes associated with all stakeholders? Do executive incentives and bonuses align with ESG initiatives in addition to shareholder return?
4. Pay gap: What is the pay gap between male and female employees at your organization? How much money does a woman earn for every dollar that a man earns in the same position? What is the pay differential between white people and people of color? Does an equitable pay and reward structure exist?
5. Diversity, equity, and inclusion (DE&I):
- Racial & gender diversity: What is the racial and gender composition of your workforce, executive teams, and board of directors? Do policies, including hiring policies, exist to make these more equitable and representative of the population? How does your company create and enforce anti-discrimination policies?
- DE&I training and programing: Ongoing company-wide training and programing is critical to raise awareness and promote and improve DE&I practices and metrics.
- Incidents & governance risk tracking: Has your organization stayed compliant while avoiding sanctions? Tracking regulatory failures or incidents can be helpful in identifying areas for improvement moving forward.
- Pandemic preparedness & impact: How prepared are your buildings and operations for the onset of a pandemic? Do you have strategies in place to respond to potential governmental ordinances or shutdowns?
ESG materiality assessments
With investors inquiring more and more frequently about what your company is doing in regard to responsible investment, how you treat employees and vendors, your dedication to sustainability initiatives, and other activities that fall under the ESG umbrella, it’s important to have answers to these questions.
An ESG materiality assessment empowers you to easily report on your current state and outline future initiatives while taking into consideration your business goals and risks. Download our guide to creating and extracting the maximum strategic value from an ESG materiality assessment.