How can you really determine the sustainability of your business? This is where the ESG metrics for sustainability come in place.
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. Besides, ESG metrics provide useful information to investors and stakeholders looking to make worthwhile sustainable long-term investments.
However, you can’t really determine the ESG metrics of your company if you have no idea what these imply. Hence, in this article, I will explain what ESG metrics are and why they are important.
Read on, also, to find out 7 crucial ESG metrics that your company should score well in order to remain sustainable and viable.
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What are ESG Metrics?
ESG metrics are an acronym for Environmental (E), Social (S), and Governance (G) metrics. Those are measuring how a company performs based on Environmental, Social, and Governance criteria. In other words, an ESG metric can be defined as a measure that tracks the progress of a business, evaluating its risk and potential for success now and in the future.
Also known as performance measures, ESG metrics come from regulations, standards, and frameworks, like the one of the World Economic Forum, that asks for or gives detailed information on specific topics.
In addition to the ESG metrics providing information about the success of a company, they also help to determine its viability and if it is worth investing in or not. It is no wonder, then, that most stakeholders and investors use ESG metrics to determine all potential sustainable investments.
ESG investing is based on the idea that a business will succeed and deliver better returns only if it creates value for its stakeholders. These stakeholders include the company’s employees, suppliers, customers, and society, regardless of whether they have shares in the company or not.
The ESG analysis takes into account how the company serves society, as well as its impact on the current performance of society.
However, the ESG analysis examines more than just the current performance of the company. It also looks into future trends, carefully taking into consideration any disruptive changes that could significantly affect the revenue of the business in the future or even its very existence.
As a result, ESG analysis and metrics help to strengthen the resilience of a business, in turn, ensuring it remains environmentally, socially, and economically sustainable now and in many more years to come. Ultimately satisfying the 3 pillars of sustainability (the 3 Ps or 3 E’s, or triple bottom line) and achieving sustainable development. In some cases, you may also want to consider a model with 4 pillars of sustainability as well.
Qualitative Vs. Quantitative ESG Metrics
Contrary to most financial datasets that are measured in numerical values, ESG metrics 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 ESG metrics to help stakeholders and investors to understand the actions and intentions of the company.
7 Key ESG Metrics You Should Track in Your Business
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 metrics 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 ESG metrics to analyze, it can be quite challenging to know where to start or where to improve.
To help you improve your ESG metrics and increase the viability of your business, consider these 7 essential metrics that your company should keep track of!
1. Diverse Board of Directors
When like-minded people work together, they provide the best results, right? Wrong! On the contrary, people who have different experiences and unique perspectives offer the best services to a company. Due to this reason, most investors analyze the board of directors and its diversity before investing in the company.
The board of directors carries the responsibility of making decisions and planning how the company will achieve success.
An effective board is not only well-structured but is also diverse, including directors of both genders, different ethnicities, and varying ages. Also, the board of directors should have different experiences and backgrounds.
Such a diverse board of directors will be more prepared to handle multiple challenges that are bound to happen during the operation of the business.
2. Carbon Footprint Reduction
The carbon footprint of a company is among the top ESG 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
Once the business has implemented all the simpler eco-friendly practices that may be appropriate, then it will be time to consider further boosting this ESG metric by getting the benefits that industry 4.0 and digital transformation technologies can offer!
The benefits of 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 ESG 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 of sustainable development 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 the benefits of 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
According to research conducted by the CFA institute, investors tend to trust companies with a strong ethical culture more than those without.
And by attracting more investors, a strong ethical culture focusing on human sustainability helps to strengthen the global capital markets. Benefiting the general society as a whole. But what exactly does having a strong ethical culture mean?
Well, being ethical means more than just obeying the law; it includes ensuring that the business and its stakeholders are exemplary stewards who always do the right thing. One effective way that companies can implement business ethics among all stakeholders is by creating a good code of conduct.
A code of conduct provides clear communication about the commitment of the company to do business in the right way and for the right reasons.
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.
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.
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 metrics 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.
Also, innovative technologies such as blockchain can be used to support sustainable business practices and improve ESG metrics. In fact, features of blockchain can support sustainability efforts.
Therefore, it goes without saying that, ESG metric scores are not just “nice to have”; they are a “must-have” for every business form or company looking to appeal to investors and make significant profits.