Measuring ESG: developing a strategy that actually works

Measuring ESG
We all know that developing a responsible sustainability and ESG strategy is increasingly essential for your business. We also know that measuring ESG scores through accurate data and monitoring is vital to implement your strategy successfully. But what’s the best way to do this? In this blog we will explore how companies can effectively measure their ESG performance and use the results to drive positive change. But before we launch into looking at the possible ESG measurement methods, let’s briefly recap why this is so important for your business in the first place.

Scales and balances: The importance of measuring ESG

Environmental, Social, and Governance (ESG) refers to the non-financial aspects of a company’s operations, such as its impact on the environment, its treatment of employees and customers, and its overall governance practices. ESG is expected to become increasingly important for companies throughout 2023 as they seek to create long-term value for all their stakeholders. Increasing demand for sustainability measures from customers and employees, as well as more stringent measurement demands from regulators, will place pressure on companies to develop an active ESG strategy involving regular tracking and measurement. A passive strategy will no longer be enough. One factor driving the importance of ESG is that companies are increasingly understanding their impact on the world around them. Companies are becoming more aware of the role they play and are seeking to make a positive impact in their communities and beyond. By measuring ESG, companies can gain a deeper understanding of the effects of their operations on the environment and society, and can identify areas where they need to improve. This information can be used to inform strategic decision-making and set sustainability targets which can be properly tracked and measured. This will help companies reduce risk by identifying areas of vulnerability and developing trackable mitigation strategies.

Give the people what they want

According to PWC, 83% of consumers want companies to adopt ESG best practices and consumers aged 17 to 38 are twice as likely as older customers to consider ESG issues when making purchasing decisions. And the hunger for sustainability is the same inside organisations, with employees demanding good ESG procedures from their employers. Measuring ESG is also critical for companies seeking to meet the evolving expectations of investors. Investors are increasingly looking to invest in companies that are socially responsible, environmentally sustainable and well-governed. In order to attract and retain these investors, companies must be able to demonstrate their commitment to ESG and show that they are taking concrete steps to improve their ESG performance. Measuring ESG helps companies communicate their ESG initiatives and efforts to investors, and provides them with the data and metrics needed to demonstrate the impact of their sustainability efforts. All these reasons highlight why ESG measurements are so important. If you’re as convinced as we are, you’re going to want to know how to go about measuring your company’s ESG impact.

How is ESG performance currently measured?

Whether because you’re seeking to invest in or procure a company, partner with them or add them to your supply chain, it can be important to ensure you have done due diligence, including assessing a business’s ESG standards. While many public companies have more stringent disclosure requirements, private companies can remain frustratingly, well, private. But there are a few options for assessing the ESG performance of a business.

Standards boards are now standard

Just like the Financial Accounting Standards board, there are now a range of ESG standards boards which help ensure consistency by defining accounting principles and reporting requirements. Examples of ESG standards boards include CDP (who release annual scores of companies’ environmental impact), GRI (Global Reporting Initiative) and CDSB (Climate Disclosure Standards Board). Equally, ESG disclosure in financial reporting is becoming increasingly common, for example, with the European Union (EU) expanding its Non-Financial Reporting Directive in 2021, which requires all businesses dealing with the EU with over 500 employees to disclose ESG information (though this is a very small fraction of businesses – for example, in 2021, 99.9% of private businesses in the UK were SMEs with less than 250 employees).

Official stamps of approval: ESG certifications

Another way to measure a company’s ESG credentials is to look to any certifications they may have. These could be to show a particular commitment to being an ethically responsible and sustainable business, such as a B Corp Certification, or to show the business meets minimum performance standards.

Challenges with measuring ESG

These sources can provide an indication of a company’s ESG ratings. But there remain a number of problems with the current measurement options.
  • Greenwashing can mislead. As ESG standards become increasingly important, some businesses are likely to engage in more convincing ‘greenwashing’. This is where companies use marketing to portray themselves as environmentally and ethically sustainable and responsible when they are in fact not, to attract customers and investors. As a result, companies will need to become more vigilant and proactive when measuring and monitoring the ESG standards of businesses, in order to control risk and reputation concerns.
  • No global standard. As listed above, there are a significant number of ESG standards boards. And these boards do not always collaborate and do not ensure their standards align. As a result, this can cause confusion when comparisons are made. They can also often be imprecise and misleading, creating opportunities for companies to greenwash without taking substantive action. The tripartite nature of ESG equally adds complexity with a focus on different areas – and some argue that the environmental, social and governance aspects can be challenging to address and measure together.
  • Private businesses remain private. There is a lack of accessible public information about private businesses, particularly small and medium size businesses which make up the majority of private companies.

Forestreet have launched real-time ESG performance scores

With all this in mind, what are the next steps? Businesses seem to be in a dilemma. It is becoming increasingly important to track ESG performance, to attract customers and investors and for risk mitigation. But at the same time, accurately judging the ESG performance of businesses feels like a huge task, fraught with hard-to-find data, greenwashing and complex measurement processes. Our ESG dashboard has been introduced to help alleviate some of this challenge. While by no means a definitive score, we hope that our ESG measurement tool can provide businesses with easily accessible up-to-date guidance. We break down the environmental, social and governance aspects of the score to give a clear overview of a company’s overall impact.
Measuring ESG
From carbon emissions and water usage to board diversity and employee engagement, our ESG Dashboard provides you with the insights and tools needed to make informed ESG decisions. Our advanced AI analyses hundreds of thousands of ESG related articles, across 26 key risk areas, to deliver a comprehensive ESG performance analysis of your market. So you can discover true sustainability leaders in any market. To find out more about how our ESG performance scores could help your business, along with other features of the Forestreet platform, book a demo today.