August 21 2023
Over the past few years, awareness around environmental, social, and governance (ESG) issues has been on the rise among consumers, investors, policymakers, and the media. As a result, there is increasing demand for companies to measure and report on their ESG performance, enabling external stakeholders to assess their overall sustainability performance and improve their social and environmental impact.
To do so, corporate actors have been relying on the myriad of existing ESG reporting frameworks, such as one developed by the Global Reporting Initiative (GRI). Many smaller companies, lacking the extensive resources of large corporations to address sustainability issues, began reporting on ESG matters by relying on a patchwork of different Key Performance Indicators (KPIs) instead of a unified framework.
It is worth noting that reporting on ESG has been a voluntary practice. However, this is about to change as the trend is moving towards mandatory sustainability disclosures, such as ESRS, the EU’s new mandatory Sustainability Reporting Standards adopted by the Commission on July 31, 2023. For now, despite not being an obligation, companies – especially big businesses – have been compelled to act by customers, clients, and investors.
With upcoming regulations and ever-growing scrutiny from key stakeholders, companies that currently lack a robust ESG reporting strategy will need to get up to speed.
Measuring ESG performance and related reporting strategies will vary among companies. If we take the example of environmental metrics (see examples below), a professional services firm with significant Scope 3 emissions from corporate travel will encounter different challenges from a global petrochemical company operating multiple plants across the world. However, regardless of size, activities or environmental impact, all companies must possess a few key “ingredients” to establish a coherent and robust ESG reporting strategy.
At the strategic level, the top-management must hold a clear vision and objectives for all three areas of ESG. Depending on the sector in which the company operates, certain measures might be easier to implement in the short term while some others might require decades. It is important to have a dedicated individual who takes full ownership of ESG, ensuring it does not simply remain a “side dish” in their responsibilities but a key priority. This strategy and the objectives should be clearly communicated to all employees.
At the operational level, teams globally need to ensure they collect and track relevant data in a systematic manner to ensure that reporting can be done, especially for environmental metrics. They should receive guidance from the team owning ESG, which will subsequently oversee the drafting of the ESG/sustainability report and track the company’s progress through the KPIs.
It will be one of the key tasks of the person in charge of ESG at a strategic level and their team of specialists to select a suitable reporting framework with KPIs tailored to the company’s specific activities. As such, there is no one-size-fits-all approach. Nevertheless, certain metrics are commonly reported by most companies and are deemed essential in measuring ESG performance and providing an overview of the company’s efforts. These include:
By tracking the right metrics through the relevant KPIs, companies can get a better understanding of how they perform in the three areas and develop the right measures to tackle what still undermines their ESG record.
With the anticipated growth of the importance of ESG reporting, companies must take proactive steps to ensure they are not left behind. This process starts by recognizing the need to lead company-wide efforts both at the strategic and operational levels, and by taking the necessary time to select the right reporting framework and associated KPIs.
A handful of links and resources to learn more about measuring ESG performance: