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People nowadays not only require corporations to create economic benefits, but also exert influence on the environment and humanistic care, as well as introducing the concept of sustainable development and mainstreaming corporate ESG (Environmental, Social, Governance). Corporations have to measure the outcomes after implementing ESG, and using ESG metrics is the best method. This article will introduce common ESG metrics, including:
- Greenhouse gas (GHG) emissions
- Amount of non-renewable waste produced
- Gender ratio of the management
- Composition of the board of directors
Explanations of why corporations need to know about these metrics will be provided along with several recommendations on improving them.
Introduction to ESG and why corporations should implement it
Based on the spirit of the UN Global Compact, ESG was established to provide corporations with measures to quantify their impact on the planet, and to further achieve sustainable corporate and even global development through specific evaluations of the actions of corporations in three aspects: economy, society, and governance.
The implementation of ESG can help corporations attract investment, win customers, and achieve sustainable development. Traditionally, large enterprises were the ones placing more importance on ESG; but as new challenges have arisen such as the sophisticated division of labor, climate change, and amendments to national regulations, both retailers and suppliers are being required to provide ESG reports to customers, regulatory authorities, and stakeholders. The execution of ESG has become an inevitable issue for every company.
What are ESG metrics?
ESG metrics are used to measure the qualitative and quantitative issues resulted from the ESG actions of corporations. They can also help corporations set up clear structures and goals during the implementation and reporting of ESG, making it possible to compare the ESG actions of corporations to some extent. For instance, GHG emissions are one of the most common ESG metrics at present, and corporations can use this metric to constantly monitor and improve their ESG actions as well as make comparisons with their peers and encourage one another. Many investors, including Morgan Stanley Capital International (MSCI) and DJI S&P, calculate ESG points using different weighting methods based on the ESG metrics included in the ESG data made public by corporations.
Why should corporations learn about ESG metrics?
If corporations do not understand ESG metrics, they can easily lack direction when implementing ESG and spend a huge amount of resources focusing on issues with little relation to themselves, resulting in investing manpower and budget yet not achieving the results that stakeholders expected. Some of the specific key factors of why corporations should learn about ESG metrics are listed below:
1. Corporations will have clear goals for the implementation of ESG
Though ESG provides a clearer definition compared to corporate social responsibility, details can be different due to the diversification of corporate business, the refined division of labor in the supply chain, and the birth of new industries. For example, investment consulting companies do not have to give a thought to the health concerns related to products, and catering operators do not have to consider the privacy issue of products collecting the costumer’s information.
Corporations need to be clear about ESG metrics to be able to derive the items closely related to themselves from the metrics and have a clear direction where to invest resources for improvements. This will enable corporations to have convincing data in their ESG reports on par with that of their peers at minimal cost.
2. The compilation of ESG reports can be facilitated
Many institutions with global credibility such as Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD), and Sustainability Accounting Standards Board (SASB) have developed their own structures to standardize these detail, namely ESG metrics, in order to assist corporations in improving the implementation efficiency of ESG as well as the quality of the ESG reports. If corporations are to keep up with the globally shared understanding of ESG, they need to learn about the details of ESG to be able to provide data that will be widely recognized.
3. The whole value chain can be better understood through an ESG perspective
Today, inclusion of the entire value chain in the assessments of both GHG emissions and corporate ESG actions is required. For instance, McDonald’s needs to pay attention not only to the electricity and water resources consumed by its restaurants and the provision of safe food, but also the ESG actions taken by its suppliers. For example, are the materials used by the suppliers of the toys and the hamburger packaging included in the Happy Meal renewable? How much GHG emissions are there in the production process? Do the farms that provide the meat for chicken nuggets use legal antibiotics and feed the animals in line with their health and welfare? Any company can have dozens of suppliers at a time when the division of labor is refined, and procurement by corporations also affects their ESG performance. Only by understanding more ESG metrics can corporations select the suppliers that truly have good ESG performance.
What are the most common ESG metrics?
Though ESG metrics vary between industries and corporations, and ESG metrics with the same title can result in different calculation or description methods due to different ESG frameworks and point calculation methods, we still compiled common ESG issues below, and identified the most widely used metrics through multiple frameworks with global credibility.
Climate change is one of the severest contemporary issues. According to the 2023 Global Risks Report released by the World Economic Forum (WEF), the top 3 global risks ranked by severity are related to climate change, which are “failure to mitigate climate change,” “failure of climate-change adaptation,” and “natural disasters and extreme weather events” in succession. Countries around the globe have drawn up various actions in response, such as national and corporate plans for the road to net zero as well as carbon taxation. Climate change has become an issue that every company has to face.
The commonly used ESG metrics for GHG emissions are direct emissions (Scope 1), indirect emissions from energy (Scope 2), and other indirect emissions (Scope 3) categorized in accordance with ISO 14064. As for GHGs, they include CO2, CH4, N2O, HFCs, PFCs, SF6, and NF3.
Use of energy
Petrochemicals are currently still burned in most places to generate electricity, causing GHG emissions when using energy. Whether it is the operation of mechanical facilities in the manufacturing industry, or the lighting and air conditioning in the service industry, energy is always consumed. Hence, this issue is one that almost every corporation should focus on.
Common ESG metrics for energy consumption include the calculation of corporate energy consumption in joule or watt-hour, and the establishment of baselines for comparing and observing the energy efficiency by period.
Use of materials
Minerals, metal, petroleum, natural gas, and coal are all non-renewable resources, and they have been decreasing as humans have developed their economies. As a result, corporations have to think about whether materials are derived from renewable resources, such as plants, or are recycled and reused, such as plastic waste in the sea. This ESG metric is mainly used in the manufacturing industry, but departments related to procurement in other industries should also consider the performance of suppliers in this metric. For instance, whether the tableware used on a plane in the airline industry is made of virgin plastic, recycled and remade plastic, or biomass materials.
Common ESG metrics for use of materials include the weight or volume of the (non-)renewable materials used in production and packaging, and the percentage of using recycled and reused materials.
Waste is not only generated during production processes in the manufacturing industry, but also in the daily lives of the employees of general corporations. Waste is generated from nearly every commercial activity, and this waste will further harm the environment if not properly dealt with.
Common metrics for waste management include the volume or weight of the waste, and the respective statistics by disposal methods, including incineration (with or without recyclable energy), landfill, and composting.
Use of water resources
The use of water resources is also an issue that every company has to address. Since freshwater resources are limited, if corporations were to exclude their communities from access to water, it would be extremely unfavorable for their ESG performance.
Common ESG metrics for use of water resources include total water withdrawal (liter), and the amounts are calculated respectively by level of water stress and by source, e.g. surface water, ground water, seawater, etc.
Diversity and equality of employees
Under today’s globalization, corporations may have employees with different nationalities, races, beliefs, and genders. A diverse composition of talent can bring corporations more perspectives and vitality, while equal wage and welfare can maintain the overall employee satisfaction.
Common ESG metrics for diversity and equality of employees include the ratio of entry-level employees and managers in terms of gender, nationality, etc., and whether employees with equal positions or similar jobs have the same basic wage regardless of gender, sexual orientation, race, or nationality.
Occupational safety and health
The majority of employees stay in the work environment for over one-third of the day, which can have a severe impact on their health. This makes corporations responsible for ensuring a safe work environment. Furthermore, maintaining the health of employees can also facilitate the improvement of production and the attraction for talent.
Common ESG metrics for occupational safety and health include the introduction of international standards (e.g. ISO regulations and management), time of education and training, number of mild, moderate, severe and fatal occupational injuries, working hours, and number and percentage of deaths from occupational diseases.
Corporations bring people and employment opportunities with them, and they cause changes in the land value or pollution emissions, all of which has great impact on local communities. In addition, corporations need local residents and shops to provide them with daily necessities and resources, such as water and electricity, to maintain smooth operation. Therefore, all corporations should devote themselves to improving community relations.
Common ESG metrics for community relations include the types and amounts of pollution emissions, community service hours, amounts donated to foundations, and usage of water resources.
Corrupt behavior can affect decisions of corporations and further threaten the execution of ESG actions and the legal rights of stakeholders. To make effort to crack down on corrupt behavior, corporations can set up internal control regulations.
Common ESG metrics for anti-corruption include whether risk assessment on corruption is conducted, the acceptance and communication of anti-corruption concepts, and the total number and percentage of employees who have received training on procedures.
Corporations directly pay their employees wages to create economic value, while they are also required to pay taxes to the local government in order to support the public sector in implementing policies that consider the welfare of the entire region. Hence, legal taxation can ensure the stable operation of corporations.
Common ESG metrics for taxes include whether there are tax policies that integrate sustainable management, the payment amount of taxes, and the ratio of tax payables to overall revenue.
5 ESG metric frameworks with global credibility
In order to assist corporations in improving the quality and readability of their ESG reports, many international organizations have developed frameworks for them to disclose ESG actions and methods; the detailed items in these frameworks are the ESG metrics. Through these frameworks, corporations are able to further understand ESG metrics.
The GRI Standards established by the Global Reporting Initiative, an independent international organization, are the most widely used criteria for sustainable development reports around the globe. They provide complete measurement of a corporation’s influence on the economy, environment, and society, as well as their positive/negative contribution to sustainable development.
The SASB standards focus on listing the ESG factors that affect a corporation’s finance. They were established by the SASB and incorporated in the ISSB under the IFRS in 2022, providing additional financial information on ESG that traditional accounting statements failed to present.
Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation
“Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation” was published by the WEF in 2020 to unify ESG frameworks. It categorized ESG standards in four pillars: Principles of Governance, Planet, People, and Prosperity.
Task Force on Climate-related Financial Disclosures
The TCFD was set up for climate change within ESG issues. Through four core elements—Governance, Strategy, Risk Management and Metrics and Targets—it aims to assist corporations and investors in understanding the risks they face and the opportunities they receive during the climate change.
Carbon Disclosure Project
The CDP is based on the TCFD recommendations, creating a questionnaire system with respect to three major issues: climate change, water resources, and forests. This is to assist corporations in grasping the relevant ESG metrics.
How to improve the ESG metrics of our company
Corporations will have several ESG metrics that need to be optimized. They can start from identifying the ESG issues that are most relevant for their business. Take McDonald’s for instance: its performance in matters they are responsible for such as procurement, deforestation, climate-related actions, packaging, diversity and inclusion of employees, and opportunities for teenagers in the community are all important ESG issues. McDonald’s can further improve the ESG metrics correspondingly. For example:
- The percentage of the suppliers aligning with international safety standards;
- The percentage of the purchased goods coming from deforestation-free supply chains;
- The percentage of emissions in the current year lower than those in the baseline year;
- The percentage of packaging made from renewable fiber or recycled resources;
- The reduction of the wage gap in the current year according to the equal wage for equal work analysis;
- The number of training programs or actual positions for employment provided to local youths, and so on.
ESG is currently an issue for all corporations. Though the ESG frameworks and the ESG metrics drawn up by rating institutions vary, many common metrics can be found if the core values remain the same. The metrics most commonly used are:
- GHG emissions
- Use of energy
- Use of materials
- Waste management
- Use of water resources
- Diversity and equality of employees
- Occupational safety and health
- Community relations
If corporations understand that these metrics are favorable to conducting ESG, preparing reports, and accomplishing responsible procurement and sales, ESG metrics will be integrated and unified in the future. The ISSB, which now includes the SASB, will produce regulations that integrate all frameworks according to the spirit of the IFRS. In the future, these regulations may become the new standard for the regulatory authorities of governments around the world to require corporations to disclose their financial information.
Work with renouvo to improve your ESG Metrics immediately
renouvo provides professional ESG consulting services that can help improve ESG metrics such as greenhouse gas emissions, renewable packaging, supply chain management, and quantity of commercial waste sent to landfills. Combining its leading low-carbon biobased compostable material technology, renouvo tailors solutions for corporations.