How to measure ESG
Environmental, social, and corporate governance (ESG) now commands over $40 trillion worth of global investment, and the figure is only likely to grow in the future.
It’s a no-brainer why that is:
- Customers and clients – the source of business, care about ESG values.
- Investors – the source of capital – increasingly appreciate that ESG investments lead to excellent long-term returns.
- Governments will have no problem issuing penalties where any laws relating to ESG are broken.
Is ESG measurable?
Is ESG measurable? The drive has never been more intense, but a central issue remains that ESG progress can often be hard to measure.
This is likely frustrating for many at the governance level of companies, who have spent their careers following the ‘measure everything’ mantra. If management and board members can’t see plain, simple figures that track progress, their instinct is to worry.
ESG progress can be measured, though. What’s important to remember is that these measurements are often not as clear-cut. They require a deeper level of analysis and an appreciation that there are much more moving parts to the concept than one figure can show.
A central issue remains that ESG progress can often be hard to measure.
Commonly, one figure isn’t enough to thoroughly measure ESG progress. The actual metric lies in considering the micro and macro alongside. In other words, one area of ESG will likely have underlying practices feeding it and, at the same time, be part of a broader structure of multiple metrics. Both levels also have an impact, so they must be measured too.
More insights require deeper analysis
The “micro” level
Say a big company is looking to measure employee satisfaction with their workplace environment. At the most basic level, they could survey all employees with a simple, five-tiered questionnaire. The responses range from “not at all satisfied” to “delighted” – a standard industry practice.
This may give partial insight, but it remains little better than the green-to-red “satisfaction” buttons in airports and supermarkets. More insights require deeper analysis.
In the 1990s, for example, clothing giant Nike interviewed tens of thousands of employees purely for this kind of deeper analysis. It was the target of frequent criticism that its suppliers mistreated workers, so it sought to find out why.
This is not the level every company needs to be at, but it does give an example of a company with an ESG challenge that took steps to paint the most transparent picture.
The “macro” level
Climate change is a considerable part of ESG, but sometimes the message gets diluted. Many corporations – and indeed the governments that regulate them – operate with the primary mantra that it’s essential to reduce carbon emissions; it is crucial, but it’s not the whole story.
This is a good example of companies needing to appreciate the “macro” level of measuring ESG. It shows how the activity of a company can be part of a larger system, fuelled by knock-on effects and fluctuating rates of chance.
Carbon emission records are just one moving part of the broader climate change machine. If only part of this machine is measured, then there’s a problem.
The activity of a company can be part of a more extensive system
Attention to other emissions
Writing for the Harvard Business Review last year, Cambridge environmental strategy researcher Dr Jennifer Howard-Grenville warned that the dominance of carbon emissions means other important metrics risk being forgotten.
Water availability was her example. She said that by the end of this decade alone, the world might need up to 40% more water than it did in 2020. Sourcing that water was also something that organisations needed a considered, careful approach to, no matter how much they were dedicated to carbon reduction.
The practicalities of measuring ESG
Measuring ESG requires the unique understanding described above, but it also requires consistency in carrying out practical tasks.
Data, data, data
Data is everything. And what’s more, data has never been easier to collect, so the opportunity should not be wasted. If there is a dataset out there that an organisation think might be helpful as an ESG metric, then it should be recorded:
- Emissions from delivery vehicles
- The carbon footprint of packaging
- Employee diversity
- Employee productivity at home versus the office
- Customer satisfaction with green initiatives.
All can be used. All should be logged.
Narrow the focus
ESG is an extensive topic, so without a well-narrowed focus, it can sometimes feel like metrics do nothing except compare apples to oranges.
Companies should dedicate time and effort to selecting what metrics matter to them. For example, a delivery company will care a lot about carbon emissions, a tech support company about employee welfare, and a farm about the impact on the local environment.
Standards should be set for these areas in each company, and they should be continuously tracked.
Without a well-narrowed focus, it can sometimes feel like ESG metrics do nothing except compare apples to oranges.
Make the right comparisons
Building on the narrowing of focus, like-for-like comparisons should be made across the industry. In other words, be smart about the fact that ESG metrics for every company are unique.
It wouldn’t work for an airline to compare its carbon emissions with a tech company just because the two have similar-sized workforces and similar market capitalisation. That’s a false equivocal. An airline has a much more impactful – and still largely unavoidable – carbon trail that a tech company never needs to worry about. When benchmarking progress, pick the organisations with a true potential for comparison.
There remains no universally standardised way of measuring ESG. Even though trillions have now been dedicated to ESG investments, the concept is still relatively new, meaning organisations frequently must set their own benchmarks and miss things in the process.
The likelihood of this changing in the short term is slim, so for now, at least, companies will continue to face the challenging task of measuring their ESG record in their way while still making it meaningful.
“ESG impact is hard to measure – but it’s not impossible” – Harvard Business Review
“How to measure ESG performance” – Multiview