Measurement and metrics for ESG issues are becoming increasingly important in decision-making by investors, regulators, business partners, and consumers. But what are ESG metrics, really? What do they look like, and why are they important?
In this article we discuss:
- What are ESG metrics?
- What is an ESG standard or framework, and what’s the difference?
- What types of ESG metrics exist, and who are the key players?
- Why use an ESG data management software to manage ESG metrics?
What is an ESG metric?
In general, a metric is a quantitative or qualitative measure used to track progress and evaluate success. For businesses, metrics are used to track progress and performance in certain areas that are critical to the viability and performance of a business, such as revenue, profitability, customers, employees, etc.
When we talk about ESG metrics, we’re really talking about performance measures or indicators of a company’s performance on environmental (E), social (S), and governance (G) issues. They are similar to other business metrics in that they are used to assess a company’s operating performance and risk. These metrics can come from standards, frameworks, or regulations that ask for very specific information. ESG metrics (performance measures) can be quantitative and qualitative, but need to give very specific information on a distinct topic.
Conventionally, investors use financial data and metrics to determine the feasibility of investing in a company. In recent times, they have been turning to ESG metrics to assess the viability and long-term performance of companies based on nonfinancial ESG risks and opportunities alongside traditional business metrics.
What’s an ESG standard, framework, or questionnaire? What’s the difference between all three, and how do they contribute to ESG metrics?
In the ESG space, the terms “ESG standard”, “ESG framework”, and “ESG questionnaire” are often conflated. But they refer to distinctly different tools for ESG reporting and management (and different underlying ESG metrics):
- An ESG standard contains detailed disclosure criteria, including performance measures or metrics. Standards involve a public interest focus, independence, due process, and public consultation, strengthening the basis of what is being asked. They provide clear, consistent criteria and specifications for companies to report on their ESG performance, targets, and policies. ESG standards require a rigorous governance process for creation and leverage consensus of stakeholders and experts.
- An ESG framework is a broader, high-level contextual “frame” for information. It is a set of principles providing guidance and shaping understanding of a certain topic, defining the direction of information but not the methodology of collection or reporting itself. It doesn’t specify performance measures, but prescribes high level disclosures. It may be used in conjunction with standards. Unlike standards, frameworks are created based on simpler advisory processes.
- An ESG questionnaire, on the other hand, is a survey administered by a third-party to solicit company responses with the goal of assessing its overall sustainability performance through an ESG rating or score. Questionnaires are developed by the third-party, and a company’s participation is voluntary. Questionnaires ask very specific information that is often aligned with existing standards and frameworks, but unlike standards and frameworks, they are typically not accessible to the public and much less transparent in their methodologies.
Even with these distinctions, there is lots of confusion in the space as every standard and framework has its own taxonomy of topics and performance measures. While there is a trend towards convergence of performance measures and common ESG metrics, there is lots of work to be done.
Quantitative vs. qualitative ESG metrics
The nature and variability of many ESG metrics is one of the main challenges facing companies today. Unlike financial datasets that are mostly numerical, ESG metrics can include both quantitative and qualitative data to help investors and other stakeholders understand a company’s actions and intentions.
Quantitative metrics are numerical values that can be easily computed and compared over time or between companies. They convey information about quantities, distances, percentages, and so on. Unlike financial metrics, they come in many different measurement units, not just dollars.
Qualitative metrics are blocs of text, therefore more difficult to collect and compare. They describe qualities, characteristics, strategies, processes, and actions that cannot be numerically measured .
In reporting on ESG issues, companies typically use both quantitative and qualitative metrics.
Examples of standards or frameworks offering specific ESG performance measures or metrics?
Global Reporting Institute (GRI) – disclosure standards
GRI is an independent, international, and non-governmental organization that aims to provide companies with a global common language to communicate ESG impacts. First published in 2010, the GRI produces sustainability reporting standards called the GRI Standards. ESG metrics under the GRI Standards are split into three categories: 1) Universal Standards (which apply to the business activities and corporate governance of all companies), 2) Sector Standards (which apply to companies in specific industries), and 3) Topic Standards (which apply to companies depending on their material impacts). In October 2021, the GRI revised its Universal Standard and released its first Sector Standard for Oil and Gas (with 40 expected in the coming years).
To download the GRI universal, sector, and topic standards click here. Identify the topics material to the business, then choose the standard that best corresponds to each of these topics.
*Note: GRI remains its own entity, but has entered into collaborative agreements with the European Financial Reporting Advisory Group (EFRAG) to draft the European Sustainability Reporting Standards and with the International Sustainability Standards Board (ISSB) to draft the IFRS Sustainability Disclosure Standards.
Here is an example of GRI ESG Standards document.
Sustainability Accounting Standards Board (SASB) – disclosure standards
SASB is an independent, not-for-profit organization established in 2011 to set standards for companies to disclose sustainability or ESG information to investors and other providers of financial capital. SASB identifies industry-specific performance measures or metrics for 77 industries. While different industries may have the same material topic, they may have different performance measures on this topic based on the nature of their activities.
To download the publicly available standards and see their underlying ESG metrics, click here. Find your industry, and download the corresponding SASB standards.
*Note: In 2021, SASB and the International Integrated Reporting Council (IIRC) merged into the new Value Reporting Foundation (VRF), which in 2022 will be merging into the International Financial Reporting Standards (IFRS) Foundation as part of the International Sustainability Standards Board (ISSB). The ISSB is in the process of creating a global set of baseline corporate sustainability disclosure standards which will leverage the industry-specific standards and standard-setting process developed by SASB.
Here is an example of SASB ESG Standards document.
World Economic Forum (WEF) – disclosure framework
The WEF is an international nonprofit founded in 1971 with the aim of engaging political, business, and cultural stakeholders and leaders to shape global, regional and industry agendas and promote entrepreneurship for the public interest.
In 2020, the WEF created its own set of ESG performance metrics, called the Stakeholder Capitalism Metrics, that are not industry-specific and serve instead as a set of universal performance measures for all companies, regardless of industry or business model. These metrics leverage various existing standards and frameworks.
To download the WEF ESG metrics, click here. Download the WEF’s Measuring Stakeholder Capitalism report, and explore the metrics under each of the WEF’s topics.
What types of topics do ESG metrics cover?
There are many, many ESG topics and underlying performance metrics, and each organization defining ESG metrics follows its own nomenclature and topic categories, which contributes to the confusion reporting companies may experience However, there are significant similarities, and as we mentioned earlier, the trend is towards convergence and even consolidation of ESG performance metrics.
Here are some ESG metrics examples (specific ESG topics and the performance metrics prescribed) from the above standards or frameworks:
Amount of Scope 1, 2, and 3 emissions
|Employee Diversity & Inclusion:
Percentage of gender / racial or ethnic group representation for management and employees
Number of data breaches, percentage breaches involving personally identifiable information, number of users affected
Total energy consumed, percentage grid electricity, percentage renewable electricity
Percentage of active workforce covered under collective bargaining agreements
Amount of net revenue in countries that have the twenty lowest rankings in Transparency International’s Corruption Perception Index
Total weight of waste diverted from disposal
|Employee health and safety:
Total recordable incident rate
|Business Model Resilience:
Amount of material recycled, composted, and processed as waste energy
Total water consumption from all areas with water stress
Ratios of standard entry level wage by gender compared to local minimum wage
Annual total compensation ratio of CEO to median for all employees
How do you know which ESG metrics to use?
Start by identifying your material ESG issues, i.e. those that matter to your operating and financial performance, or that matter to the protection of the environment or the betterment of society. Then, refer to the main standards or frameworks that offer specific performance measures or metrics on these topics, and identify the ones that make sense for you. These may include ones that you may already be measuring or those that can help you better manage the issues in question.
Why is ESG data management software important to manage ESG Metrics?
The complexity of ESG metrics, along with multiple frameworks, standards, and questionnaires available, makes it difficult for businesses to compile, organize, and report on their performance using ESG metrics that are relevant to them. Businesses struggle with the complex data gathering processes, poor data quality, and a lack of appropriate assurance available. At the same time, they are foregoing the value creating potential of better managing their risks and opportunities.
For ESG data to be available, comparable, and reliable, it needs to be regulated, standardized, and externally assured. To meet all of these requirements efficiently , ESG data and ESG metrics must be digitized.
Novisto’s ESG software is designed to digitally transform ESG data management. Our end-to-end SaaS solutions help companies create a centralized system of record for ESG dataー making it quick and easy to collect, share, and use. Our platform ensures that corporate ESG data, workflows, and reporting are trusted (read: auditable, like financial data), efficient (automated and streamlined), and insightful (contextualized, with clear guidance for decision-making). Novisto integrates major standards, frameworks, and questionnaires to facilitate companies’ data collection and reporting practices..
As focus on sustainability and ESG issues continues to rise, so will the need for more and better ESG information, including the need for reliable and comparable quantitative and qualitative ESG metrics. Digitization is critical to achieving this. To learn more about Novisto or request a demo to see how we can help your company, click here.