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Just as ESG means different things to different organisations, depending on their perspectives and priorities, so the definition of ESG performance, whether good or bad, varies wildly between companies and sectors. Taking the measure of a business’s ESG performance requires an understanding of what that business’s ultimate goals are.
For a business looking to measure its environmental, social and governance (ESG) performance, there is, at present, no single scale or ideal to hold itself up against. Those looking for a numerical result drawn from ESG data to feed into their end of year results will be disappointed. While various ESG ratings systems do exist, when quantifying overall ESG performance, it remains a case of ‘it depends’.
One major thing on which it depends is the specific elements of ESG the business is focused on. The ESG umbrella encompasses a vast array of concerns, both macro and micro, individual and sector-wide, any of which could be used as a test case to judge overall performance. How a company’s operations impact the environment; how it manages supplier relationships and treats its staff; its interaction with the community in which it is rooted; corporate governance including its leadership ethos and executive behaviours all qualify. From the minutiae of employee benefits to a commitment to become carbon neutral by the end of the decade, any activity that falls under one of these categories is a potential marker for ESG attainment.
What good ESG performance looks like to a business therefore depends on what ESG means to that business.
How important these different elements are depends on the nature of the organisation, its business priorities and overall vision. It will rest on the risks and opportunities apparent in any ESG strategy. Any liability created by poor ESG performance can be calculated, as can potential opportunities arising from good behaviours. With risk management now necessarily incorporating ESG considerations, this provides one means of measuring performance.
The success of a business’s ESG policy and practice is also reflected in how its stakeholders feel about it. Whatever aspects of ESG are on the table, they will impact some or all of the company’s stakeholders.
Understanding which ESG issues matter most to its stakeholders, and which stakeholders matter most to the business, provides a basis for measuring ESG performance.
At its crudest level, good ESG performance will result in stakeholders feeling better about the organisation, and having a better relationship with it. It can influence a purchasing or investment decision, the acceptance of a job or a contract. This will be reflected in near-term proxy measures of ESG performance, such as growth in sales, increased customer lifetime value, and retention of employees due to job satisfaction. While not always simple to put a number on, these results can be the clearest short-term indicators that a business is performing well on ESG.
Among stakeholder groups, shareholders perhaps have the keenest sense of the value of ESG information. Socially responsible investing has been around for a long time – arguably for centuries – with investors looking to maximise financial returns while doing the right thing. ESG investing is its natural successor, attempting to formalise the investment process by creating funds comprised of companies with good ESG pedigrees. Institutional investors have started using ESG reports to guide their investment strategies, and the inclusion of a business in such a portfolio is a recognition of good ESG performance.
Another factor on which ESG performance depends is what an organisation says it is going to do in this arena. Setting targets, and holding to that standard, provides a yardstick for achievements.
With so many companies making so much noise about their ESG credentials, publishing sweeping, global goals for environmental, social and governance activities, actually delivering against those claims, has become the differentiator.
ESG targets reflect the aspirations of the company, its vision and how it hopes to be viewed by its stakeholders. They can also create business value, potentially opening up new markets, winning new customers, cutting costs, motivating suppliers and building resilience. But as a marker of performance, it is the achievements of these goals that matters. For the grand-scale changes, it will be a while before success can be acknowledged, so businesses which also incorporate less ambitious, more quickly achievable aims into their ESG strategy can be short-term winners against this performance indicator.
In so broad a field, with so many potential markers for success, ESG performance may appear to be either too nebulous or too complex to measure effectively. With so many cases of ‘it depends’, and so many criteria on which the results depend, there is no one-size-fits-all solution for quantifying ESG performance.
Nonetheless, a business that monitors all of the various performance indicators outlined here, sets targets for ESG policies, tracks achievements against those targets, and is accountable for their results will have a clear understanding of its ESG position.
In the long term, ESG performance will become intrinsically linked to financial performance, the measurement of the former being a predictive indicator of the latter. While ESG criteria are still being formalised, and solid, heavyweight data around ESG’s consistent impact on financial performance is still being compiled, ESG issues are being recognised as factors that will ultimately benefit the long-term bottom line. This form of measurement also ‘depends’, of course – on how long term a view is taken.
In these formative days of the evolution of ESG criteria, the plotting and publishing of any data on ESG issues has value. There are already a number of numerical models for measuring ESG performance, and tools available for businesses to score their ESG credentials and present those scores in a meaningful way. ESG intelligence offers a means of comparison against competitors and the wider industry that is an important facet of overall performance measurement. As the solutions become ever more sophisticated, so will businesses’ understanding of their ESG performance.
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