This blog post is geared toward Environmental, Social & Governance (ESG) professionals looking to understand different aspects of ESG and some metrics that can be reported via ESG reports as part of their organization’s ESG reporting (annual reports) in relation to representing the sustainability aspect of their business. An understanding of different aspects of ESG can help you in getting started with ESG initiatives and ESG reporting. ESG initiatives can help companies improve their overall sustainability factor while creating a positive impact on environmental, social, and governance issues.
Getting started with ESG-related practices in your organization or department (such as procurement) requires a set of ESG initiatives and related performance measures including ESG KPIs / metrics for internal and external ESG reporting purposes. In this relation, it is of utmost importance to understand ESG KPIs / metrics and how to track ESG metrics in order to assess the performance of ESG initiatives. Data analytics can play a key role in identifying KPIs, data needed for that KPIs, and building dashboards for tracking those KPIs. In this blog, we will learn about concepts of ESG and relevant metrics / KPIs. This blog will be updated from time to time with the latest information on ESG reporting.
What is ESG?
ESG is an acronym that stands for Environment, Social, and Governance. ESGs issues or factors encompass issues such as those related to the environment (climate change impacts across the supply chain), social (employee, supplier, and customer relations, diversity, equity and inclusion (DEI)), and governance (corporate governance aspects). ESG focuses on the environmental and social impact of businesses in addition to financial performance and governance structures.
A sustainable business refers to the process of incorporating ESG factors into business decision making.
ESG has become increasingly important as investors are looking for companies that not only have strong financial performance but also those that are sustainable and have a positive impact on society and the environment. ESG can impact sustainability in several ways. For example, companies that focus on ESG may be more likely to adopt renewable energy sources, which can help to reduce greenhouse gas emissions. In addition, companies that focus on ESG may be more likely to have better employee relations, which can lead to lower turnover rates and improved morale. Ultimately, ESG can help businesses to be more sustainable by improving financial performance, reducing environmental impact, and improving social outcomes.
Many businesses are now beginning to focus on ESG because it can have a positive impact on sustainability. When companies focus on ESG, they often make decisions that are better for the environment and society as a whole. There are a number of reasons why businesses should focus on ESG. First, ESG investments have been shown to outperform traditional investments over the long term. Second, customers and consumers are increasingly interested in purchasing products from companies with good ESG scores. Finally, ESG can help businesses to improve their sustainability practices and reduce their environmental impact.
Whether you are an organization or a business unit within an organization such as procurement working on your sustainability goals, your investment and financial decisions in relation to buying, purchasing, or procuring goods and services must take into account ESG factors reported using ESG metrics / KPIs of your suppliers. Implementing ESG initiatives and doing ESG reporting (metrics / KPIs) like financial reporting can help your organization acquire greater opportunities from investors and government while managing risks that they may have in relation to the negative impact on the company’s reputation if they aren’t addressed properly.
While ESG initiatives are of enterprise-wide importance and can be incorporated into almost every department, the procurement teams have a significant role to play in the implementation of ESG initiatives by implementing ESG criteria such as those related to the environment (supply chain vs climate change impact) and social (suppliers diversity) factors. ESG data can be included in KPIs to measure the impact of ESGs on company performance.
ESG Reporting & KPIs / Metrics
ESG reporting does mean the following:
- Metrics / KPIs that can represent how ESG factors affect your business at large
- Metrics / KPIs that can represent how your business impacts environmental, social and governance issues or factors.
The international sustainability standards board (ISSB) has been set up around Oct-Nov 2021 to lay down the sustainability standards based on which the ESG reporting can be done. The following are some of the examples of ESG KPIs / metrics that become part of ESG reporting:
- Metrics that relate to the usage of natural resources. For example, some examples include the following:
- Greenhouse gas (GHG) emissions metrics include scope 1, scope 2, and scope 3 metrics. Scope 1 emissions metrics would capture KPIs related to direct emissions from owned or controlled sources. Scope 2 emissions metrics would capture KPIs related to indirect emissions from the generation of purchased energy consumed by the reporting company. Scope 3 emissions metrics would represent KPIs related to all other indirect emissions that occur in a company’s value chain. Capturing scope 3 emissions metrics and creating one or more reports would be a real challenge and require companies and their suppliers to work together. For example, Pfizer reported a 7% decrease in scope 1 and scope 2 emissions in comparison to 2019 based on this Pfizer ESG report (2021). Reduction in scope 1 and 2 emissions can be one of the important metrics / KPIs. A technology solution such as permissioned Blockchain based on hierarchical blockchain architecture could prove to be very helpful in tracking scope 3 emissions. It might require companies and suppliers to form a consortium and work on these initiatives to capture the metrics in a trustworthy manner while ensuring traceability. A GHG protocol is set up to allow companies to assess their entire value chain emissions impact and identify where to focus GHG reduction activities. The goal of the GHG Protocol is to develop internationally accepted greenhouse gas (GHG) accounting and reporting standards and tools and to promote their adoption in order to achieve a low emissions economy worldwide.
- Here is a quick introduction to greenhouse gas emissions. Greenhouse gases are emissions that contribute to the greenhouse effect. The greenhouse effect is a process that occurs when certain gases in the Earth’s atmosphere trap heat. Greenhouse gases include carbon dioxide, methane, nitrous oxide, etc. Greenhouse gas emissions can come from natural sources, like animal agriculture and forest fires, or human-made sources, like burning fossil fuels and industrial processes. Greenhouse gas emissions are often measured in terms of their “CO₂ equivalent,” which is the amount of CO₂ that would have the same global warming potential over a 100-year period. Greenhouse gas emissions can have a negative impact on the environment and public health. As a result, many organizations are interested in reducing greenhouse gas emissions as part of their environmental, social, and governance (ESG) initiatives. Greenhouse gas emission reductions can be achieved through a variety of means, including energy efficiency measures, renewable energy projects, and changes to industrial processes.
- Renewable energy is an important part of the global effort to reduce reliance on fossil fuels and mitigate climate change. Many companies are now setting goals to increase their use of renewable energy, but there is no standard way to measure renewable energy consumption. As a result, various metrics have been developed to track renewable energy consumption by different companies. There are a variety of ways to measure renewable energy consumption. The following are some of the common metrics. By understanding these different metrics, it is possible to get a clear picture of renewable energy consumption.
- The most common metric is the renewable energy share, which represents the percentage of the total energy that comes from renewable sources.
- The most common metric is renewable energy intensity, which measures the renewable energy consumed per unit of output. This metric can be used to compare the renewable energy consumption of different manufacturing companies, or to track the renewable energy intensity of a single company over time.
- Another common metric is renewable energy intensity ratio, which measures the percentage of a company’s total energy consumption that comes from renewable sources.
- Another metric is renewable energy footprint measures the renewable energy consumed per unit of land area. This metric is useful for assessing the impact of renewable energy on the environment.
- Greenhouse gas (GHG) emissions metrics include scope 1, scope 2, and scope 3 metrics. Scope 1 emissions metrics would capture KPIs related to direct emissions from owned or controlled sources. Scope 2 emissions metrics would capture KPIs related to indirect emissions from the generation of purchased energy consumed by the reporting company. Scope 3 emissions metrics would represent KPIs related to all other indirect emissions that occur in a company’s value chain. Capturing scope 3 emissions metrics and creating one or more reports would be a real challenge and require companies and their suppliers to work together. For example, Pfizer reported a 7% decrease in scope 1 and scope 2 emissions in comparison to 2019 based on this Pfizer ESG report (2021). Reduction in scope 1 and 2 emissions can be one of the important metrics / KPIs. A technology solution such as permissioned Blockchain based on hierarchical blockchain architecture could prove to be very helpful in tracking scope 3 emissions. It might require companies and suppliers to form a consortium and work on these initiatives to capture the metrics in a trustworthy manner while ensuring traceability. A GHG protocol is set up to allow companies to assess their entire value chain emissions impact and identify where to focus GHG reduction activities. The goal of the GHG Protocol is to develop internationally accepted greenhouse gas (GHG) accounting and reporting standards and tools and to promote their adoption in order to achieve a low emissions economy worldwide.
- Metrics that related to the environmental impact on water scarcity and quality relative to business activities such as manufacturing processes, transportation, etc. Water consumption is a critical environmental metric for many companies, especially those in water-intensive industries such as manufacturing. Water is a finite resource, and as such, it is important for companies to be aware of their water consumption and take steps to reduce their impact. Water conservation is not only important for environmental reasons, but also for financial reasons. Water is becoming an increasingly scarce resource, and as demand increases, so too will the price of water. As a result, companies that are able to reduce their water consumption will be at a competitive advantage. While there are a variety of ways to measure water consumption, the most common metrics are some of the following:
- Water footprint: This metric measures the total amount of fresh water used by a company, including the water used in its manufacturing processes, as well as the water used by its employees and customers. Pfizer reported a metrics of 15% reduction in water withdrawal with respect to 2020 as per this Pfizer ESG report.
- In addition to the Water Footprint, other important metrics used to measure water consumption include the Virtual water footprint and the water risk index. These metrics help investors assess a company’s exposure to water risk and its ESG (environmental, social, and governance) performance.
- Total water withdrawal measures the quantity of water withdrawn from all sources (surface water, groundwater, etc.) on an annual basis.
- Metrics that relate to the health and safety of employees, communities, patients, or consumers the business interacts with. Some ESG KPIs include the following:
- Lost time incident rate (LTI),
- Frequency rate (FI) per 100 full-time workers (FTEs).
- Workplace injuries/illnesses by severity, type, and costs.
- Metrics that measure initiatives such as energy efficiency improvements in industrial facilities or an increase in the recycling of materials by a company. ESG KPIs can be used to track progress towards environmental goals set out for reducing water usage, greenhouse gas emissions, etc., which is one aspect of ESG reporting. This is done by measuring the ESG initiative’s impact on water usage, etc.
- Metrics that relate to the ethical and compliance aspect of a business such as human rights, labor policies, environmental concerns, etc. ESG KPIs include supply chain impact for child labor or forced/prison labor; diversity within leadership ranks; safety compliance; or regulatory compliance. ESG KPIs are also used to measure the effectiveness of ESG initiatives by measuring changes in ESG compliance, risk management policies, work conditions, environmental impact, etc.
- Social metrics that measure ESG initiatives are focused on community development and corporate philanthropy. ESG KPIs include the number of employees volunteering in their local communities, the percentage of the workforce participating in volunteer programs, etc.
- ESG KPIs also track the financial contribution a company is making to sustainable causes such as environmental protection or poverty alleviation efforts through measures like charitable giving, ESG spending efficiency & effectiveness, etc.
- ESGs KPIs can be used to measure the ESG performance of a company’s supply chain and suppliers. This includes specific ESG metrics such as worker rights, immigration status, environmental impact from raw materials, etc.
- ESG KPIs are also used to track supplier diversity with respect to gender or race relative to workforce demographics within a business. Metrics such as supplier ESG management and ESG business acquisition can be used to measure ESG initiatives taken by suppliers. ESGs KPIs use specific metrics such as the number of employees, gender diversity, etc., within a supply chain or workforce demographics relative to those numbers within an organization’s own workforce. Metrics that assess workers’ rights in developing countries, supplier ESG management and ESG business acquisition, etc.
- The “G” part (Governance) of ESG can be related to risk management associated with suppliers. ESG KPIs can be used to track risks, disclosure, and performance. This includes metrics such as risk management policies with suppliers; supplier ESG compliance assessments, etc.; It is extremely important to manage supplier risk in order to maintain a consistent supply of quality products and services to customers.
ESG Priorities
Different organizations can lay down different priorities related to environmental, social and governance aspect of ESG. For example, Pfizer has got following as ESG priorities:
- Climate change (Greenhouse gas emissions, scope 3 emissions traceability across the supply chain, etc)
- Diversity, equity and inclusion (DEI – Inclusive employees experience, Equitable health outcomes, etc.)
- Product innovation
- Equitable access and pricing (Right to health equity)
- Product quality and safety
- Business ethics (Transparency, ethical decision making, open door culture)
How to track ESG KPIs / metrics?
The following represents different techniques that could be used to track ESG KPIs / metrics:
- ESG Dashboard: ESG data is becoming increasingly available thanks to the rise of ESG reporting standards and the development of ESG data analytics tools. Dashboards are a great way to track ESG data because they provide a clear and concise overview of a company’s ESG performance. ESG data can be used to track a wide range of factors, including a company’s greenhouse gas emissions, water usage, employee satisfaction, and diversity. By tracking ESG data, investors can gain a better understanding of a company’s ability to manage these important issues. There are many different aspects of ESG that can be tracked on a dashboard. For example, a company’s carbon footprint is an important environmental factor. Social factors include things like employee satisfaction and diversity. Governance factors include things like board composition and executive compensation.
- ESG Social Media Tracking & Analytics: Social media is an important platform for conveying ESG information to stakeholders. Tracking and analyzing ESG social media activity can help companies and organizations understand how they are perceived by the public, identify key ESG issues, and track progress over time. ESG social media tracking and analytics can also help businesses make better-informed decisions about where to allocate resources to achieve the greatest impact.
- ESG Data Analytics & Modeling: ESG data analytics is the process of collecting, storing, and analyzing data related to a company’s environmental, social, and governance (ESG) performance. ESG data is becoming increasingly important for investors and companies alike. ESG data can help investors assess a company’s performance in areas like environmental sustainability, employee relations, and corporate governance. This data can come from a variety of sources, including financial reports, public disclosures, media coverage, and third-party ratings. ESG data analytics can be used to track a company’s progress on ESG goals, identify areas of improvement, and compare ESG performance against peers. ESG data analytics can also be used to generate ESG metrics, which are numerical values that represent a company’s ESG performance. ESG data can be used to create ESG models, which are mathematical models that simulate how a company’s ESG performance may impact its financial performance. By using machine learning algorithms, companies can identify ESG risk factors and forecast how they might impact the company in the future. By analyzing a company’s financial filings, news articles, and other data sources, machine learning algorithms can identify patterns that are associated with ESG best practices. This information can then be used to make strategic decisions about where to allocate resources and how to mitigate risks.
Who is responsible for tracking ESG KPIs?
ESG team is responsible for ESG KPIs/metrics. The composition of the ESG team will vary depending on the industry. Either the ESG team may be responsible for ESG KPIs/metrics or ESG metrics are not tracked in-house but outsourced to consultants, which means you would need to work with outside teams and support them when needed.
ESGs KPIs are extremely important because ESG success is measured by tracking ESGs factors and related metrics. ESG metrics & KPIs can help measure ESG performance of a company’s business sustainability including their investments related to supply chain and suppliers, its risk management policies with suppliers, supplier ESG compliance assessments, etc., which in turn affect the quality of products/services available for customers. If you’re responsible for an organization that has ESGs as part of its mission statement- it’s your responsibility to ensure that these metrics are being tracked accurately so that they can tell the story about how successful your ESGs have been.
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