How to Measure ESG (Environmental Social Governance) and Set High-Quality Metrics
Measuring a company's operational ESG (environmental social governance) performance is a challenging process. ESG is cross-departmental by nature, often encompassing a wide range of metrics and data around a company’s sustainability, employee diversity, labor practices, governance, company culture, innovation, and more.
In a sense, ESG is one of the truest reflections of a company’s business: what’s the company’s real identity and purpose? Who works there? What values, practices, and principles does it (genuinely) stand for? How does the organization achieve and measure the pursuit of its mission?
In most cases, ESG measurement, stakeholder alignment, and value creation also go hand-in-hand. Being able to make a strong business case for your ESG performance (and their outcomes) - then backing up that ESG ROI case up with compelling, data-backed storytelling - is the best way to win internal executive buy-in and positive external consideration from ESG investors, customers, partners, and other stakeholders.
In our work with ESG leaders, we typically recommend and work around a 6-step process:
1. Connect the dots between your brand, business model, materiality, and ESG business case
Your ESG materiality themes and topics should reflect your brand and business model. For example, a technology company might choose to focus its ESG initiatives on STEAM (Science, Technology, Engineering, Art, and Math) education and tech workforce diversity, because both of those areas align with the company's cultural DNA, products, and services.
By comparison, a retail apparel company might look at gender and racial equity, representative, body-positive imagery, and supply chain sustainability improvements because those are most material to its brand. Look at your company identity and values: ESG should build on that foundation, reinforce it, and be a vehicle for positive social and organizational change.
Once you’ve identified your material ESG themes, topics, and focus areas, build a strong business case around them. Organizations like Campbell's, Havas, Nike, Starbucks, TIAA, and Unilever have found clear correlations between robust ESG programs and employee morale, loyalty, and retention, and - in some cases - direct sales growth.
We encourage ESG and sustainability leaders to sync with HR to measure and understand employee recruitment and retention costs, or marketing to understand the relationship to brand awareness and consideration. Does strong ESG performance increase qualified job applications? What are the business benefits to increasing employee retention by 33%? Does the company's latest ESG announcement drive quantifiable, positive brand impact? Can you put a number on it?
Similarly, are there other cost-savings associated with your programs? Or brand lift that can drive revenue or improve reputation?
Data consistently shows that not only is ESG the right thing to do, but, when implemented and measured thoughtfully, it’s almost always ROI and shareholder value-positive for companies as well.
2. Map your ESG initiatives to metrics and measurement indicators
Your next step is making sure each ESG theme and initiative in your company has clear measurable KPIs (key performance indicators). In some disciplines, these indicators are fairly clear cut: in sustainability, measuring your greenhouse gas (GHG) emisisons in Scope 1, 2 & 3 CO2 equivalents (CO2e) generated from operations is an established, material indicator and carbon accounting approach. In other areas like financial inclusion, philanthropy, or education, impact accounting standards may be less uniform, and should be developed in conversation with stakeholders and partners.
That said, we generally recommend a company design and set ESG KPIs and metrics in these business areas:
- Carbon Footprint Reduction - One of the your company's most important ESG metrics is its greenhouse gas (GHG) emissions footprint. If you haven't already, measuring the company's baseline should be a top priority for your sustainability team, then setting a thoughtful emissions reduction target
- Energy and Water Efficiency - Depending on your business model and value chain, your energy and/or water footprint may be sigificant and material, both financially and in terms of its environmental impacts. Again, measuring baselines and setting energy efficiency and water (and wastewater) reduction targets should be a key metric within your overall ESG strategy. Often, energy efficiency and water improvements are some of the highest ROI capex investments a company can make within ESG
- Employee Health and Safety (EHS) - Most companies - particularly manufacturing and product-centric businesses - know how operationally important EHS is in the context of the organization's overall success and risk management. Make sure to take that a step further and not only measure operational EHS metrics, but also key culture and employee wellness KPIs like employee satisfaction, engagement, and retention, peer satisfaction, work environment quality, fair compensation, and other key indicators about the health, motivation, and resilience of your people
- Diversity, Equity, Inclusion, and Belonging (DEI&B) - Make sure to not only collect data, but set clear metrics, policies, targets, and ecosystem support as an organization to champion, promote, and resource DEI&B. Go beyond general diversity pie charts and consider setting metrics and targets around applicant and hiring diversity, management diversity, board diversity, supplier diversity, or employee resource group (ERG) involvement. It's critical for your business to not only measure diversity in hiring, but also promote it culturally in terms of career advancement, representation, engagement, and employee retention
- Product Quality, Sustainability, and Safety - Product safety and sustainability play incredibly important roles in building customer (and investor) trust. Have you performed a lifecycle assessment (LCA) for your top products? Do you have metrics and targets for responsible sourcing? Have you set up KPIs and targets around product quality, safety, and durability? What about end-of-life treatment of your products? Are there opportunities for recycling, re-use, and/or circularity? Product can be one of the most material places to connect your organization's ESG strategy with operational execution and innovation
While individual departments may be responsible for specific ESG metrics and measurement areas, it's important for CEOs, CFOs, and ESG leaders to create a unified, company-wide analytics approach. In order for ESG to really drive business benefits, competitive advantages, and social impact, it must be part of the company's top-level strategy, supported by the C-suite, and adopted across the organization.
You can't delegate ESG or company purpose to a single department
Beyond that, ESG indicators need to be material and relevant. For example, employee volunteering participation could be a meaningful indicator for employee engagement, but likely not for broader social impact or ESG performance (by itself at least), as there are likely better ways your organization can help vulnerable communities or give back. When ESG indicators aren't material (and then get communicated publicly) it raises the risk of provoking external criticism for greenwashing or being insincere. The more your programs and communication efforts focus on material change (and indicators), the better your reputational, brand, and business-related ESG performance will be.
Similarly, rather than trying to boil the ocean or appease everyone, focus on doing (and measuring) a few specific things well, then build from there.
3. Audit and identify your ESG measurement and data gaps
As the old saying goes, you can't improve what you don't understand or have the ability to measure. If your company doesn't strong ESG data management, analytics, and tracking capabilities, you need to work with IT, operations, and other internal data stakeholders to set them up. Many traditional supply chain management systems, ERPs, and databases aren't designed for sustainability reporting or ESG metrics, so make sure you take that into account, or use a dedicated supply chain sustainability system like Brightest.
Define and agree on your key ESG metrics and data sources early on in the process, and be sure to audit and come up with solutions to fill gaps. Find the right balance between your internal goals and science-based sustainability targets, global ESG reporting standards, supplier ESG surveys, and trusted third party advice to determine what to measure (and how).
We recommend considering at least these themes as a starting point:
4. Engage Your ESG and CSR partners
While you know what's best for your business or brand, often your partners (ex: non-profits, suppliers, third party experts, independent standards, or a system like Brightest) can provide helpful best practices when it comes to measuring ESG. This is one of the main reasons we invest so much in supporting cross-organizational ESG and sustainability collaboration inside our ESG platform. Whether it's impact between a company and its non-profit partners, a foundation and its grant recipients, or a brand working with its suppliers around more responsible sourcing, the theme's always the same: it's always some combination of hard, slow, or an incomplete picture doing it alone. Positive internal and external relationships - supported by quality data - are critical for ESG measurement success.
Be sure to listen, collaborate, and engage your partners in the measurement conversation.
5. Create the right ESG measurement system
Most ESG professionals understand the relationship between strategy, operations, data, and reporting. The challenge is creating a consistent process to efficiently get the data you need to measure results, report on success, and reinforce the positive transformation ESG can have across your business. Make sure you have a way to get the underlying data you need to track each indicator.
The more you simplify, centralize, and streamline your ESG data collection and management process, the more time you'll have to focus on program work, affirming your outcomes, and celebrating success.
And remember, your non-profit partners, grant recipients, and other front-line impact organizations are usually the closest to the spaces where positive impact is happening. Make sure to schedule ongoing check-ins and impact measurement surveys to collect the underlying impact and performance insights you need for the social side of your ESG reporting. Employee metrics and diversity should be a top priority, but external social stakeholder data is important too.
6. Close the loop between ESG measurement, reporting, and communication
Effectively understanding and communicating ESG results and outcomes to stakeholders is one of the most important responsibilities of any ESG professional. Your ESG strategy, measurement, and reporting approach should be closely tied to your communications strategy: where, when, how, and why are you telling your brand's ESG story? All the pieces need to fit together.
There are a lot of potential channels for ESG storytelling: internal communications, annual reports, websites, social media, press, ESG ratings providers - where are you focusing? And does your ESG measurement strategy provide credible proof your organization's achieving the impact and outcomes its pursuing (or claiming)?
Wherever you are in your ESG measurement roadmap, ESG is a journey, and we wish you all the best as you continue making (and measuring) your progress and impact. If we can be helpful at all (at any step in your process), please get in touch. A central part of our mission here at Brightest is enabling better data-driven decision-making (not to mention actions and communication) for good.
