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As regulators, consumers, investors, and business partners become more focused on ESG issues, the need for accurate metrics and measurements becomes more essential. But what do these metrics actually look like? And why are they so important? As attention to sustainability and ESG matters continues to grow, there is a need for more and better ESG data, which includes both quantitative and qualitative ESG metrics that can be reliably compared. Digitalization is a vital part of this process.
Even though ESG initiatives are applicable to all parts of a business, the procurement team has an important role to play in the integration of ESG criteria such as those related to the environment (supply chain vs. climate change influence) and social (supplier variety) aspects for the way the corporate integrates with larger ecosystems of suppliers and consumers, and the impact of it
ESG data can and should also be incorporated into KPIs to evaluate its effect on a company's performance.
ESG metrics have become increasingly important to investors as sustainability issues become more mainstream, increasing corporate transparency and enabling investors to better understand the risks and opportunities of investing in certain companies and industries.
The recent study published by Computex Taipei, called Equity Investment Highlights Observation, shows that in October 2022, the quantity of global investments in ESG related to energy/resources/environment had the highest number, showing that the fields of renewable energy, energy storage batteries, carbon capture and conversion, bio-based chemical products, charging infrastructure, and other areas were favored by investors, following the trend of global net-zero emission commitments and the Carbon Border Adjustment Mechanism (CBAM) in Europe and the United States.
ESG metrics incorporate aspects of sustainability that can be quantified, such as greenhouse gas emissions. These metrics are often a function of an organization’s business activities, such as the percentage of renewable energy used by the company.
The benefits of measuring ESG performance are manifold, including a more comprehensive and sophisticated view of company risk and opportunity, a more strategic approach to management and resource allocation, improved customer engagement, stronger relationships with employees and suppliers, reduced costs, and enhanced reputations as sustainable and responsible companies.
It is a continuous mechanism of improvement, market benchmarking, and analytic understanding of areas and ways to streamline processes and innovate.
Due to their strategic role in sourcing and supplier management, procurement teams are uniquely qualified to support ESG initiatives. For example, in the context of climate change, procurement teams can help mitigate the risks associated with potential supply chain disruption by diversifying supplier locations and commodities and increasing overall supplier resilience.
They can also help identify and reduce risks associated with potential shortages in the availability of raw materials, and enhance opportunities such as increased access to renewable energy.
The design and implementation of robust sustainability metrics and an effective data management system to track and report on them are critical for measuring the progress of ESG initiatives and the success of sustainability KPIs. ESG reporting does mean the following:
The International Sustainability Standards Board (ISSB) has been set up around October and November 2021, to lay down the sustainability standards based on which ESG reporting can be done. The following are some of the examples of ESG KPIs and metrics that become part of ESG reporting:
In addition to the benefits mentioned above, measuring ESG performance can also bring about important advantages for companies, including a more comprehensive and sophisticated view of company risk and opportunity, a more strategic approach to management and resource allocation, improved customer engagement, stronger relationships with employees and suppliers, reduced costs, and enhanced reputations as sustainable and responsible companies. However, acquiring and managing data related to ESG metrics can be challenging and costly. For example, gathering and managing greenhouse gas emissions data can be difficult, given the need to measure emissions generated at suppliers’ facilities as well as include emissions generated as a result of the company’s own operations. Similarly, gathering and managing data related to employee working conditions is often time-consuming and resource-intensive.
Utilizing blockchain technology could be very beneficial for a reliable and traceable method of collecting metrics. To accomplish this, companies and suppliers would have to form a digital ecosystem for sharing information, or a consortium.
Digitization involves making analog information digital, whereas digitalization is all about transforming existing processes into digital ones. Both are essential to achieving the advantages of measuring ESG performance because they give businesses the capacity to collect and store information about ESG metrics in a location that can be accessed and used by internal stakeholders across departments as well as external stakeholders, such as investors and suppliers.
Blockchain is a distributed database that allows for secure, transparent, and tamper-proof transactions. The adoption of blockchain technology, a decentralized digital ledger where data is safely shared, improves the quality and reliability of the data and makes it easier for companies to track and report on progress against ESG initiatives. It also allows for the use of automated tools to facilitate data collection, analysis, and visualization, making it easier for businesses to manage this data, identify and mitigate risks associated with ESG factors, and maximize opportunities.
The types and levels of data collected in relation to ESG metrics will depend on the nature of the industry and the specific business activities. For example: the aviation sector will have different requirements and data needs than the food and beverage sector. Airline companies will likely have to track emissions related to the transportation of passengers and cargo, while beverage companies will likely have to track emissions related to the production and transportation of raw materials. Similarly, the food and beverage sector will likely have to manage data related to the employee working conditions of the workers who produce and distribute these products, while the airline sector will likely have to manage the same type of data, but related to the pilots and the cabin crew. Looking at the issue of workplace and leadership diversity, airline companies will manage data related to the representation of women and other underrepresented groups in management positions, and in the case of food and beverage companies, they will likely have to manage data related to the representation of different ethnicities and nationalities company wide.
Understanding what measures matter to fulfill investors' ESG aspirations is a basic step, whether your organization is aiming to improve its KPI tracking capability or tracking ESG KPIs for the first time. The next stage is to figure out how to gather and report on that data.
How ESG and KPIs relate
Font source: European Federation of Financial Analyst Societies (EFFAS), 17
Overview of General ESGs and their KPIs - Applied to ALL Sectors
Font source: European Federation of Financial Analyst Societies (EFFAS), 19
Initially, DVFA offered sector-specific ESGs and KPIs for a select few industries. While various parties are currently defining additional sectors, DVFA encourages third parties to develop sets of ESGs and KPIs for additional industries.
In general, the sets to be created should have the following characteristics:
Third parties and groups composed of members from various stakeholder groups, such as individual investment professionals from the sell- or buy-side, brokers, investment firms, corporates, ESG assurance providers and advisors, academics, and so on, can define a set of proposed ESGs and KPIs.
The world has seen tremendous changes in recent years in terms of public and investor interest in sustainable business practices. The rise in social consciousness has meant that companies are now expected to take a more responsible approach to business and are being held accountable for their impacts on the environment and their communities.
Measuring sustainability performance and tracking progress against sustainability targets are critical to ensuring that companies are successfully managing these issues.
For the past few years, Finboot has been offering our services to corporations such as Repsol, Stahl, and Iberia to help them incorporate blockchain into their processes and meet their Environmental, Social, and Governance (ESG) agendas.
A fundamental, necessary step to understanding how blockchain can improve our lives is to recognize the significance of transparency and the trustworthiness of data in decreasing the environmental impact of business activities. An example is that a blockchain-fueled solution can reduce or even eliminate the need for on-site checks and assessments, which can bring economic and environmental gains.
Furthermore, blockchain technology can be used to guarantee transparency in an incomparable way, allowing companies to widely share the way they measure and declare their sustainability credentials.
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