The recently-concluded 2022 UN Climate Change Conference or COP27 once more brought to the fore the dire need to limit global greenhouse gas emissions and keep global temperature rises to within 1.5 degrees Celcius above pre-industrial levels. COP27 will also go down in history as the conference where developed countries agreed to finance rescue and rebuilding in countries struck by natural disasters. However, the main difficulty lies in enforcing the matters agreed upon. The focus now shifts back to individual countries and how they will gain the consensus to deliver on their Nationally Determined Contributions (NDCs); and in keeping with a key outcome of COP26 in Glasgow in 2021, how countries will enforce transparent reporting on corporate sustainability efforts using ESG metrics and globally-accepted ESG standards.
In some of our recent blog posts, we discussed the various aspects of ESG adoption for organizations and how they can work towards favourable ESG scores and ratings. We have established that Digital ESG Reporting is the way forward for companies aiming for transparency in sustainability efforts and disclosures. In this article, we will deal with the ESG metrics that matter for companies and their investors under the pillars of Environmental, Social, and Governance.
ESG Metrics that Matter
Environmental Metrics
Air and Water Pollution: Under the metrics that measure air and water pollution fall the Greenhouse Gas Emissions that companies are directly and indirectly responsible for; Product Carbon Footprint, or the amount of carbon released into the atmosphere in the course of manufacturing a product; and water pollution, or companies’ contribution to the contamination of water sources through the release of effluents.
Water Security: Many researchers believe that if there were to be World War III, it would be fought over water. Companies, in their own microenvironment, could be contributing to a growing water crisis in their manufacturing or supply chains. In this metric, companies may show the steps they take to safeguard water sources and prevent wastage.
Safeguarding Biodiversity: What are companies doing to safeguard biodiversity? Are they contributing to large-scale deforestation to build new facilities? The International Finance Corporation lists habitat loss and degradation, erosion, species loss, and introduction of non-native species as the direct impacts of corporate activity on biodiversity. Indirect impacts are caused by entities operating in a company’s supply chain.
Business Circularity: This metric takes into consideration a zero-waste approach to business through proper recycling and waste management measures. Business circularity requires rethinking and restructuring product supply chains to put in place a sustainable system that is still competitive. The idea is to reduce dependence on fossil fuels and scarce resources and use fully recyclable, renewable, and biodegradable input materials.
Energy Efficiency: Energy efficiency is among the most important and also easiest metrics to measure. By making a commitment towards energy efficiency, companies can both reduce greenhouse gas emissions as well as reduce energy costs. Energy efficiency can be achieved in the various facilities of an organization, its transportation systems, and its supply chain.
Social Metrics
Diversity and Inclusion: Companies must support diversity and inclusion at the workplace to mainly support marginalized communities and offer them opportunities to showcase their skills and make a positive contribution to society and the economy. This metric measures companies’ efforts towards diversity and inclusion through gender, ethnicity, and minority representation in their workforce.
Community Relations: Community relations is a broad metric that includes an organization’s labour standards, employee engagement, customer satisfaction, efforts at mitigating human rights abuses, and measures towards animal welfare. These are the sum of an organization’s interactions with the society in which it operates. Today’s investor or business stakeholder wants to ensure that a company is above board in all areas where its interests intersect with that of society.
Product Safety: Products must be safe not only for the consumer to use but also for the workforce involved in producing or creating them. For instance, there have been instances in the recent past where products for infants were found to contain carcinogenic substances. The company involved had to compensate the consumer concerned for the damage that was done. Companies are also responsible for workers doing their jobs in unsafe conditions.
Responsible Sourcing: Companies must be careful where they source their raw material from. In several parts of the world, the extraction and sale of minerals such as tin, tantalum, tungsten and gold are seen benefitting armed groups in politically unstable nations. These minerals are used in the manufacture of mobile phones, cars and jewellery. Companies must also ensure that their raw material supply chains are sustainable. Supply chain disruptions during the Covid-19 pandemic are a case in point.
Data Protection and Privacy: Protecting the data and privacy of consumers is critical and several jurisdictions have stringent measures in place to safeguard citizens, such as the EU’s General Data Protection Regulation (GDPR). The issue gains more relevance in the face of data breaches and cyber security incidents that put both individuals and organizations at risk. Data protection and privacy issues are factored into an organisation’s reputation with both employees and customers more willing to work with and buy from entities that have a good track record in these areas.
Governance Metrics
Board Composition: Several global regulators such as the UK’s Financial Conduct Authority (FCA) have taken steps towards ensuring company boards have 40% women members and also those representing ethnic minorities. Another critical issue is that of executive compensation, with calls for incentives to be linked to companies’ ESG-related achievements. It goes without saying that companies must ensure there is no conflict of interest in board-level appointments.
Shareholder Rights: Shareholder actions to safeguard and promote ESG issues is on a rise like never before. In recent years, shareholders have been seen reversing company decisions, such as the replacement of three directors at Exxonmobil in 2021 with nominees who have strong environmental credentials. Organizations today have no choice but to allow and act in accordance with activist shareholder actions that can have a big impact on the course of business decisions.
Accounting Transparency: Organizations must be transparent about their financial and non-financial reporting and disclosure, and even about their audit committee structure. The most crucial step towards transparency is the adoption of digital disclosures through the use of open data standards such as XBRL. Organizations adopting digital reporting are known to have benefitted from reduced costs of capital and more easy access to credit, along with the reputational advantage that comes from greater transparency.
Investor Relations: Organizations must ensure their stakeholders have access to the information they need, both on the financial and sustainability fronts. Today’s investors are not driven purely by a profit motive. They look at a business holistically to ensure there are no risks from its operation to both the organization itself and to its external environment and society. Transparency and clear communication with investors and safeguarding their interests form a vital metric that companies must measure.
Miscellaneous Metrics: Political contributions and lobbying, bribery and corruption, and whistleblower schemes are metrics included in the ‘Governance’ aspects of ESG. While organizations must develop working relationships with the government and political entities in whose jurisdiction they operate, at times these relationships are prone to misuse. Suspect political contributions and bribery in unhealthy democracies can hurt an organization’s reputation and expose it to criticism.
