Measuring Sustainability Performance
I have previously blogged about the link between ESG reporting and sustainability. In this blog, I will briefly address the question of whether gathering and reporting ESG data really matters.
ESG reporting provides a specific framework for evaluating and measuring a company’s sustainability performance. It assesses a company’s ESG-related risks and opportunities by providing a standardized approach for stakeholders, including investors, creditors, regulators and society in general, to assess corporate sustainability.
ESG Factors?
ESG is a broad range of non-financial issues that can create risks and opportunities inherent in a company’s operations. Investors are increasingly incorporating ESG elements into their investment decision making process, making ESG increasingly important from the perspective of securing debt and equity capital. While ESG is typically used in the context of investing, it has also been applied to customers, suppliers, employees and the public.
ESG’s emphasis on financial considerations is based on its belief that companies performing better on these issues can increase shareholder value by more than those who disregard them. That might be, for example, through avoiding the reputational or litigation risks associated with environmental disasters or poor governance. Over time, ESG investing has grown to about $150 trillion assets under management during the period 2006-2021, according to the Principles for Responsible Investment Initiative (PRI).
The following have been identified as comprising the elements of ESG.
Environmental. Issues related to the natural world including greenhouse gas (GHG) and non GHG emissions; renewable/non-renewable energy generation and usage; biodiversity; land use; material resource use; water management and waste; climate policies and their effects.
Social. Issues related to the lives of humans, such as human rights, modern slavery, child labor; business ethics including working conditions, employee relations and DEI factors.
Governance. Decision-making factors that affect a business, such as the gender and ethnic diversity of board composition, executive pay, bribery and corruption policies, political lobbying and donations, and accurate and reliable financial reports.
Exhibit 1 depicts the relationship between the three factors of ESG. Understanding these factors is crucial for companies to improve overall sustainability.
Sustainability Reporting
Tyagi (2023) describes seven steps of sustainability reporting including: (1) engage stakeholders; (2) conduct materiality assessment; (3) gather and analyze data; (4) compile report; (5) verify and assure; (6) communicate effectively; and (7) improve and iterate.
Of particular note is the assessment of materiality. Tyagi recommends that it should entail identifying the most significant ESG issues that require attention and disclosure. He suggests the following process (Tyagi, 2023).
- Gather relevant data through internal and external sources (i.e., industry standards, regulations, and stakeholder expectations).
- Evaluate the potential effects of these issues on the organization’s operations and wider societal implications.
- Integrate the identified material issues into the organization’s sustainability strategy and business operations including setting key performance indicators (KPIs) related to these issues.
- Show how the organization is addressing material concerns.
Compiling the report involves structuring the gathered data that provides a meaningful narrative including (Tyagi, 2023).
- Relevant compliance requirements.
- Requirements of the chosen sustainability reporting standard.
- Consistent with the materiality assessment.
- Meets stakeholder expectations.
The sustainability report should address ESG issues using a framework for reporting that aligns with global reporting standards like the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB). The framework should be used consistently and be comparable across reports (Tyagi, 2023).
Measuring ESG: Assurance Considerations
In addition to an assessment of materiality, the report should be verified to ensure credibility and reliability of the disclosed information. The assurance can be conducted internally or externally as follows:
Internal. Conduct reviews to validate data accuracy and adherence to reporting standards through an internal audit process to verify the contents of the report.
External. Engage independent sustainability experts to audit the report and provide external assurance. External validation enhances trust in the report’s transparency and accuracy.
Once the process is complete, the organization should seek feedback and assess whether changes should be made in the reporting framework. This is important to adapt to changing circumstances including stakeholder needs and report information.
Criticisms of ESG
A common criticism of environmental data is “greenwashing.” Greenwashing is the process of conveying a false impression or misleading information about how a company’s products are environmentally sound. Greenwashing involves making an unsupportable claim to deceive consumers into believing that a company’s products are environmentally friendly or have a greater positive environmental impact than they do. A company might emphasize sustainable aspects of a product to overshadow its involvement in environmentally harmful practices. Another practice is to use false information to intentionally hide wrongdoing, such as misleading labels. This practice is known as “whitewashing.” The bottom line is that a company may adopt practices that suggest environmentally conscious or friendly practices to capitalize on the growing demand for environmentally sound products.
There is a lot to be said for reporting ESG data. Society has evolved with respect to what they expect from public companies, and this includes non-financial reporting in addition to the traditional financial reporting. Today, it is an accepted notion that companies have social responsibilities, and sustainability reporting/ESG can meet those needs. Moreover, today’s younger generation want to work for companies that are sensitive to how their activities affect the environment and social relations, such as DEI. Recruiting and retaining today’s generation calls for sensitivity to these issues.
Posted by Steven Mintz, Ph.D., aka Ethics Sage, on June 18, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.
