Introduction To ESG Metrics and Analysis

ESG metrics are used to measure the performance, governance, transparency, and sustainability of a business. Those measurements help to determine the company’s ability to succeed in the long term and provide useful information to investors and stakeholders.

However, you can’t really determine the metrics of your company if you have no idea what these imply.

ESG metrics are vital tools for assessing a business’s sustainability, providing insights into its risk profile and future potential based on environmental, social, and governance standards.

These metrics, derived from established frameworks, help investors evaluate a company’s long-term viability and its commitment to creating value beyond financial returns.

Through ESG analysis, companies are scrutinized for their societal impact and contribution, with a forward-looking perspective that considers potential disruptive trends.

This comprehensive evaluation not only informs investment decisions but also bolsters a business’s resilience, ensuring its sustainability across all three ESG dimensions.

Qualitative Vs. Quantitative Metrics 

Contrary to most financial datasets that are measured in numerical values, measurements of ESG include both qualitative and quantitative data.

Qualitative ESG metrics are blocks of text that describe the actions, strategies, qualities, processes, and characteristics of a company. Since these cannot be measured numerically, they are usually hard to collect and analyze.

On the other hand, quantitative ESG metrics are numerical values that provide information about percentages, quantities, and distances. And unlike financial metrics that only come in dollars, these metrics come in multiple measurement units. Since they are numerical values, quantitative metrics are easier to compute and analyze. Those can be easily compared between companies or over time. 

Typically, companies use both qualitative and quantitative metrics to help stakeholders and investors to understand the actions and intentions of the company. 

7 Key ESG Metrics to Track

Now more than ever, investors are carrying out socially responsible investing. This is an approach toward sustainable investing that keenly evaluates environmental, social, and governance aspects, providing useful information on the impact of the investment in the company. 

Through ESG data analysis, investors are now able to determine which companies are worth investing in and which are not.

Therefore, if you intend to increase your company’s viability and attract more investors, you need to provide updated ESG reports. However, since there are so many different metrics to analyze, it can be quite challenging to know where to start or where to improve. 

1. Diverse Board of Directors

While it’s commonly believed that like-minded teams perform best, diversity in perspectives, experiences, and backgrounds, particularly in a company’s board of directors, actually enhances decision-making and problem-solving.

Investors often scrutinize a board’s diversity as it significantly impacts a company’s approach to challenges and opportunities, indicating that a varied board is more equipped to navigate the complexities of business operations and drive success.

2. Carbon Footprint Reduction

The carbon footprint of a company is among the top metrics that investors and stakeholders look into when analyzing a firm. In fact, it is considered a standard metric when analyzing the environmental impact of a business. 

When a company puts more effort into reducing carbon emissions, it helps to slow climate change, contributing to a more sustainable planet.

Here are three simple, yet very effective tips on how you can reduce the carbon footprint of your company:

• Reduce, reuse and recycle all materials used in the company.
• Reduce business travel using private cars; rather, opt for cycling, walking, or using public transportation.
• Use renewable sources of energy

Digital transformation can be leveraged to modernize your entire business and dramatically improve its efficiency. This will greatly improve this ESG metric by reducing waste and energy consumption of the company, putting it at the forefront of the fourth industrial revolution.

3. Product Safety

When potential investors are analyzing a company, they look into the risks related to the products and how these risks are being managed or minimized.

It goes without saying that sustainable investors trust products that are safe. This is because safe products indicate that the company cares greatly about its employees and customers, as well as its own reputation. 

Therefore, when creating or improving existing metrics, you would do well to consider tracking the fines and litigations associated with the safety of the product.

Also, regardless of whether your business deals with manufacturing or consumer goods, you should put more emphasis on monitoring product safety and ensure that you always have readily available updates about the safety of your products.

4. Diversity and Inclusion

As mentioned in point one above, diversity within the board of directors is very crucial. Even so, diversity is also important throughout the company, from the directors to the employees and the suppliers. Not only do diversity and inclusion attract more sustainable investors, but it also improves the overall performance of the business.

To encourage more diversity and inclusion in your company, carry out programs, such as an apprenticeship education program. These programs promote a multi-lingual work culture that encourages teams to outperform others, leading to higher profitability in the company. 

Therefore, if you intend to build a company that appeals to investors and also benefits you financially, you would do well to encourage a diverse and more inclusive culture throughout the organization.

5. Energy Efficiency Improvements

Contrary to what most business owners think, the energy efficiency metric is not hard to achieve. In fact, it is one of the simplest ESG metrics that any company can implement and provide impressive results. After all, to improve the energy efficiency of your business, all you need to do is to finish the same projects using less energy.

To cut down on energy, start by implementing small changes that do not interfere with normal business operations. Remember, small changes make such a big impact, and they significantly help to reduce energy costs in the long run.

There are many examples that can give you ideas on how to improve energy efficiency. Consider those simple tips on how you can improve the energy efficiency of the company:

• Turn off all lights that are not being used.
• Use energy-saving lightbulbs in all places.
• Encourage your employees to use natural light whenever possible.
• Shut down and unplug all equipment after working hours.

More sophisticated approaches can instead leverage green technologies and industry 4.0 by implementing sustainable manufacturing and using technologies such as IoT and artificial intelligence to dramatically boost productivity without increasing energy consumption.

6. Established Business Ethics

Investors gravitate towards companies with robust ethical cultures, as evidenced by research from the CFA Institute, recognizing that such companies contribute positively to global capital markets and society.

A strong ethical culture transcends legal compliance, embodying a commitment to integrity and responsible stewardship.

Implementing a comprehensive code of conduct is a pivotal strategy for companies to instill and communicate their ethical standards. Ensuring all stakeholders align with the company’s core values of conducting business responsibly and with integrity.

7. Employee Health and Safety

Do you know which businesses have been ranked to perform best in the market? They are none other than award-winning health and safety firms. This is clear proof that employees who are happy, healthy, and safe contribute to more success for the business. 

When you ensure the good health and safety of your employees, you minimize any work-related accidents and improve production rates, in turn boosting the overall profits of the business.

Besides, investors consider good safety management in a company as an indication of its operational performance, financial status, and competency in handling problems and risks. 

ESG Criteria

Integrating ESG criteria is crucial for all companies. When you evaluate investments using these criteria, you increase your potential for long-term financial returns.

On the other hand, investments that do not take the ESG criteria into account have a negative impact on the company’s financial returns.

Consider those three ESG criteria commonly used to measure the performance of a company!

A. Environment Criteria 

The environmental criteria consider how a particular company or firm executes its activities as a guardian of nature.

It takes into account factors such as the company’s waste management program, usage of renewable energy sources, attitude toward climate change, as well as how the company handles any problems that come about due to water or air pollution arising from the operations.

The environmental criteria also consider all environmental risks that could have a negative effect on the company’s revenue. For example, a firm may encounter environmental risks if it owns an oil spill site or a contaminated piece of land.

Besides, the criteria focus on how a company manages environmental risks, ensuring that all its activities are aimed at attaining environmental sustainability.

B. Social Criteria

This criterion looks into how a company manages relations with customers, suppliers, employees, and the general community where it operates.

According to most socially responsible investors, among the top key relationships of a company is its relationship with the employees.

Social criteria focus on the human and social related factors of a business, such as community welfare, human rights, the health of stakeholders, children, and forced labor.

C. Governance Criteria

Governance criteria are all about the management of a company.

How do those holding managerial positions in the top executive offices operate the firm?

It takes into account the company’s audits, shareholder rights, leadership, internal controls, and executive pay. Also, governance criteria analyze board diversity, board independence, overall quality of management, and any existing conflicts of interest.

Conclusion

Did you know that 70% of all carbon emissions are from the business sector? And considering the drastically-changing climate conditions, unless you start doing business in a more sustainable way, there are high chances that your company won’t be here for long!

Therefore, if you want to secure your investment now and in the future, it is time to improve the performance and sustainability of your company.

ESG measurements play a significant role in determining the viability of a business to investors, as well as its financial performance now and in the future.

Tracking the qualitative and quantitative metrics of your business can help you carry out sustainable business practices in your company, contributing to environmental sustainability.