Understanding ESG Metrics: An Introduction To ESG Reporting

The world of ESG reporting moves quickly. New proposals, frameworks and legislations seem to appear almost daily. And with over 600 different ratings and frameworks currently in circulation, it can be difficult to determine what you need to know, and where your company should focus its ESG strategy.

In this article, we’re breaking down the complex world of ESG metrics. But before we get to ESG metrics, it’s helpful to first understand ESG reporting frameworks and disclosure standards.

What Are ESG Reporting Frameworks?

A reporting framework is a set of concepts and principles determining how information is structured and prepared, and what broad topics are covered. ESG reporting frameworks, in particular, provide a set of (often voluntary) principles for companies to follow when preparing disclosures on their ESG performance. 

Disclosure frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD) establish useful recommendations for determining what to communicate about a company’s sustainability-related risks and opportunities, both in terms of what the company does (or doesn’t do) about those risks and opportunities, and how they do it.

What Are ESG Disclosure Standards?

Standards contain technical specifications or other precise criteria designed to be used consistently as a rule, guideline, or definition. ESG disclosure standards, in particular, provide clear, consistent criteria and specifications for companies to report on their ESG performance, targets, and policies. More so than frameworks, disclosure standards help promote consistency and comparability of information, both between reporting companies and between each reporting year for a company.

ESG disclosure standards are typically developed with consensus from several organizations and experts, and following public consultations. The two most commonly used sets of sustainability disclosure standards come from the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB).

Standards Vs. Frameworks

While ESG disclosure standards and frameworks can be used together and are often complementary, they differ in many respects. Standards, such as the GRI and SASB Standards, are specific and well-defined. They provide companies with detailed guidance on reporting requirements for disclosing performance on ESG topics. On the other hand, frameworks provide mostly principles-based guidance on what companies should report on, and how reports should be prepared.

Each standard requires a rigorous governance process for creation with multiple iterations between the disclosure standard developer and the public, while frameworks take a mostly advisory approach. In many parts of the world, disclosure standards are often mandated, while frameworks are typically recommendations taken up voluntarily by proactive companies. Both can be helpful tools for developing sustainability strategies and identifying sustainability-related risks and opportunities. 

What Are ESG Metrics?

ESG metrics are similar to business metrics. They are used to assess a company’s performance on environmental, social, and governance (ESG) issues, which in turn influences how a company creates, erodes, or preserves long-term value. These metrics might include measures such as GHG emissions intensity, amount of waste generated, and board gender diversity, and they can come from disclosure standards, frameworks, or regulations.

Where traditional investors use only financial data to determine the feasibility of investing in a company, many if not most investors today use ESG metrics alongside financial data to assess the viability and long-term performance of companies. A 2020 survey by Edelman revealed that 88% of institutional investors in the US believe that companies that prioritize ESG initiatives represent better opportunities for long-term returns than companies that don’t. Likewise, consumers, employees, and other stakeholders may use ESG indicators to determine whether they will purchase from, work for, or do business with a company.

Qualitative Vs. Quantitative ESG Metrics

By nature, ESG metrics are diverse. They cover many different topics, and can come in both quantitative and qualitative formats.

Quantitative ESG metrics are similar to financial metrics and can be easily computed and compared across companies or between years for a company. One important difference between quantitative ESG and financial metrics is that quantitative financial data typically comes in one single unit, such as dollars (or other currencies), while quantitative ESG metrics cover many different unit families, such as energy flows, weight of inputs or outputs, accidents/incidents/injuries, number of people/employees, and so on, because they measure different things.

Qualitative ESG metrics are usually more difficult to compute and compare, but they can be useful to complement and contextualize quantitative data. One example of a qualitative ESG metric is a description of a safety management system, how it is implemented and tested, and its outcomes.

What Are Some Examples Of ESG Metrics?

Because there are so many ways a business can impact and be impacted by the environment and society, ESG comprises an enormous data category. ESG metrics are organized under topics or pillars, and branch off to specific, individual metrics. Here are some common ESG metrics:

Environmental Social Governance
GHG emissions: Amount of Scope 1, 2, and 3 emissionsEmployee Diversity & Inclusion: Percentage of gender / racial or ethnic group representation for management and employeesCybersecurity: Number of data breaches, percentage breaches involving personally identifiable information, number of users affected
Energy management:
Total energy consumed, percentage grid electricity, percentage renewable electricity
Labor practices: Percentage of active workforce covered under collective bargaining agreementsBusiness ethics: Amount of net revenue in countries that have the twenty lowest rankings in Transparency International’s Corruption Perception Index
Waste management: Total weight of waste diverted from disposalEmployee health and safety: Total recordable incident rateBusiness Model Resilience: Amount/percentage of material recycled, composted, and processed as waste energy
Water management: Total water consumption from all areas with water stressPay equity: Ratios of standard entry level wage by gender compared to local minimum wageRemuneration: Annual total compensation ratio of CEO to median for all employees

Need Help With ESG Metrics?

Whether you’re just getting started on your ESG journey, or you’re working from spreadsheets and legacy tools and looking for more sophisticated ESG management, Novisto can help you improve data quality, clarify your ESG metrics, and conquer your reporting challenges.

To learn more about what our ESG reporting software can do for your organization, request a demo today.

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