Tying KPI’s to Your ESG Program

With increased environmental and social disclosures in an environment that lacks standardization, investors must decipher between a robust ESG program and one that markets an image of environmental and social responsibility.

Greenwashing is the corporate practice of spending more time and money on marketing the green nature of products and services rather than making them more sustainable. Think, Volkswagen cheating on its emissions tests while touting its low-emission vehicles.

While often this can be unintentional, a good rule for companies is not to offer ESG commitments without the key initiatives or metrics to support it.

The ESG landscape is quickly evolving, and investors are no longer willing to settle for vague policy statements or lackluster sustainability commitments. Investor stewardship teams are looking for companies to provide clear, concise, and digestible data to support a company’s ESG narrative.

Be sure it is clear to your board and your investors, which metrics are used to measure the key ESG risks and opportunities facing your business.

The following are a few guidelines to follow to stay on the right side of ESG reporting.

Step 1: Understand Global Guidelines and Standards

  • UN Sustainable Development Goals
    • The UN sustainable development goals (SDGs) consist of 17 goals that aim to be achieved by 2030. Companies can use the UN SDG’s to guide their thinking in the following ways:
      • Using goals 5.5, 8.5, and 10.4, companies can spark change and drive equality for women and minority groups through promoting leadership positions and providing equal pay.
      • Looking to goals 6.3 and 12.5, companies can substantially reduce waste generation through promoting recycling and eliminating the dumping of hazardous materials.
      • Lastly, goals 8.2 and 8.2 suggest that businesses should support economic growth through diversification, technological innovation, and development-oriented policies to add value.
  • UN Global Compact
    • The UN Global Compact is celebrating 20 years since it was initiated to bring business and the United Nations together to ‘give a human face to the global market’. Ten principles help to guide businesses to meet fundamental responsibilities in the areas of human rights, labor, environment, and anti-corruption. In addition to these ten principles, the UN Global Compact adopted a goal-oriented plan for achieving a better future by targeting 17 ‘Sustainable Development Goals’ (SDGs), which help to define an ideal world.
  • Global Reporting Initiative
    • The Global Reporting Initiative (GRI) is an international standards organization that provides environmental and social reporting standards to companies, governments, non-profits, and other organizations. GRI sets forth three universal standards that every organization should disclose (foundation standards, general disclosures, and management approach)—as well as a modular set of standards (economic, environmental, and social) from which organizations are encouraged to choose material topics to disclose.
  • UN Principles for Responsible Investment
    • The Principles for Responsible Investment (PRI) is the world’s largest investor network for sustainable investing. Established in 2005 by the UN Secretary General Kofi Annan, the PRI is now a privately funded organization with over 2,250 signatories (asset owners, investment managers, and service providers) committed to the six principles.
    • The six Principles for Responsible Investment outline key ESG investing principles for incorporating ESG issues into investment analysis and decision-marking, adopting ESG issues into ownership policies, and seeking ESG disclosures by the entities in which they invest. In signing the Principles, investors publicly commit to adopt and implement these six Principles.
    • Starting in 2020, PRI’s intend to make certain TCFD-aligned indicators mandatory to report (but voluntary to disclose). Signatories will retain the option of being able to make their responses to this module either private or public.

Step 2: Identify Sector-specific ESG Issues

  • SASB 
    • The Sustainability Accounting Standards Board (SASB) is a ratings agency focused on materials risks. Thus, they collect ESG data quantitatively to be able to measure against benchmarks effectively, so it is important how companies display this data, to ensure it is digested accurately.
  • SASB also encourages companies to put out employee and/or stakeholder surveys to self-identify areas of opportunity for further disclosure, increase employee alignment over the long-term, and improve management receptiveness of the company. This is a great way for small- and mid-cap companies to identify their “end goal” for their sustainability program and develop ESG disclosures aligned with SASB. Learn more about this in the Investor Perspective on the Evolving ESG Landscape.
  • MSCI ESG Research
    • MSCI is a global leader and external ESG ratings service that measures a company’s resilience to long-term, financially relevant ESG risks, that investors use to make informed investment decisions. Through a rules-based methodology, MSCI uses artificial intelligence and alternative data to focus on what is significant to a company’s bottom-line and comparable with its peer group, to deliver dynamic insights to investors.
  • Sustainalytics
    • Sustainalytics is a leading ESG ratings and data provider offering ESG analytics and corporate ratings for public companies. Sustainalytics uses a two-dimensional framework to rate companies based on industry exposure and management. Industry exposure rates a company based on industry risks; whereas, management scores rate a company based on policies, programs, practices, and quantitative performance measures. All companies have a comprehensive report, but only larger capitalization companies also have a core report which adds new topics for inclusion. Be sure to review your company’s industry exposure and management scores to determine which topics are material for your industry.

Step 3: Adjust for company-specific situation

  • Market cap (size), age (business cycle)
    • Just because companies are micro/small cap or relatively young, it does not mean they get a “pass” on certain ESG categories. Controversies drive the buy side’s view of a company, so an issue arises if companies do not disclose, regardless of size. However, the buy side does think about the level of disclosure based on the size and age of the company – not in terms of if a company is a good discloser, but so they understand what is material to their investment.
    • Frequent and high-quality management engagement helps to offset low quality disclosures but does not fix the problem of overreliance on data and ESG ratings. Low quality disclosures lead to genuinely material factors not being incorporated into the ratings process which results in undervalued ESG ratings. In order to maximize ESG investor interest, both the data and management availability need to be top notch.
  • Business structure and operations (ownership structure)
    • As you drill-down to more specific business structures and operational tendencies, companies differ on which regulations and related metrics to highlight. For instance, a company with outsourced operating plants will have a larger focus on emissions and supply chain management compared to a start-up tech firm’s focus on data security and risk management.
    • More particularly, larger businesses can have their own risk and sustainability departments to ensure that the company is following all protocols as well as going above and beyond for sustainability initiatives. Albeit smaller companies can also do this by creating tasks forces or by bringing in ESG experts.
  • Geographic scope
    • Climate change can carry physical risks that are event-driven due to acute (e.g., severity of extreme weather events) or longer-term, chronic patterns (e.g., sustained higher temperatures, causing sea level rise and/or chronic heat waves/drought. These risks can obviously result in direct damage to company assets. However, they can also have indirect impact due to supply chain disruption. Thus, organization financial performance can be affected by such variables as: water availability; sourcing and quality; food security; and supply chain, transport, and employee safety. 
    • Now more than ever, the geographic scope is a significant aspect given current market conditions, a global pandemic, and civil unrest. These issues have brought ESG to the forefront and had organizations reevaluate their impact on the world. Companies can take an active approach by reaching out to institutional investor and stakeholders regarding ESG issues. By engaging with investors now, companies can make meaningful headway in addressing complex ESG issues before they become a source of contention at the next annual meeting.

Include these ESG KPIs in investor communication

Ultimately, to prevent greenwashing, let the numbers tell your story. Whether it is the increased number of women on your board or decreased amount of waste emissions, per UN Sustainable Development Goals, those numbers can show investors your dedication to ESG factors, and it is important to include them in various communications.

  • First, the investor relations website is a main source of traction for ESG content; some businesses even have their own ESG home page, linking to various resources.
  • Email letters from executives or social media is also a great way connect with current or potential investor contacts.
  • Lastly, ESG-specific materials like an annual CSR or sustainability report is a great way to have all of the company’s ESG yearly ESG data in one place. Companies have also started to make their reports even more up-to-date with online, not PDF, reports to update the numbers on a more regular basis.
  • Additional examples for sharing information the IR website can be found here Bulking Up your IR Website.
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