ESG indicators

What are ESG indicators?

Environmental, Social and Governance (or ESG) indicators are three sets of criteria that can be used to measure the sustainability impact of a company. These criteria serve as a model for companies to carry out more ethical and sustainable operations. Essentially, ESG indicators are a compass, setting companies on a path to sustainability which minimizes their environmental footprint, generates a positive social impact, and ensures that solid and ethical governance practices are maintained.

The importance of ESG indicators

ESG indicators are a highly useful tool that allow the sustainable credentials of a company to be evaluated. They enable organizations not only to comply with regulation and meet investor expectations, but also to enhance their corporate reputation, mitigate risks, and what’s more, access additional capital and credit from sustainable institutions.

Meeting these indicators also helps companies to create long-term value, as well make a meaningful contribution to sustainable development. The latter is becoming increasingly important in the modern business landscape, as demand grows for greater transparency and accountability from investors, regulators, and consumers alike.

Types of ESG indicators

Each type of indicator helps companies to identify areas of environmental impact, set matching sustainability goals, and track their progress. There are three main types of indicator, each with its own set of KPIs. Let’s take a look at some of the most important ones below:

Environmental indicators

Environmental indicators focus on evaluating how a company impacts the natural environment, and what steps it takes to soften its environmental footprint. They aim to measure tangible results, such as:

• Waste management: How the company manages and reduces any solid or liquid waste it produces, as well as minimizes its impact on the environment.
• Energy efficiency: The measures a company takes to optimize energy use, reduce consumption, and improve upon its use of renewable energy sources.
• Greenhouse gas emissions: Strategies and practices designed to reduce carbon emissions and other harmful gasses that contribute to climate change.
• Natural resource conservation: The act of preserving and sustainably using natural resources such as water, minerals, and vegetation.

Social indicators

These indicators focus on the impact a company’s policies and practices have on its employees, customers, and the wider community in general. Social indicators typically measure:

• Diversity and inclusion: Policies and efforts made to promote a diverse and inclusive workforce that promotes equal opportunities for all.
• Gender equality: Measures taken to ensure gender equality at all levels of an organization, including providing equal pay and offering adequate professional development opportunities.
• Human rights: A company’s commitment to respecting and furthering human rights in all its operations and supply chains.
• Fair labor practices: Working conditions which must ensure dignity and fairness for all employees, including health and safety in the workplace.
• Community Engagement: Initiatives and programs implemented by a company that aim to improve the conditions of local communities.

Governance or corporate governance indicators

Finally, this set of indicators determine how a company is managed and overseen internally, covering parameters such as transparency, ethics, and responsibility practices. They include:

• Transparency: The level of clarity and openness within a company’s processes and decisions, and in its communications with stakeholders.
• Business ethics: The adoption of ethical practices in all areas of an organization. This includes the determination to fight against corruption and fraud.
• Risk management: Strategies and systems implemented to identify, assess, and mitigate any potential risks that may affect the company.
• Executive compensation: Policies that govern how senior managers are compensated, ensuring that remuneration is fair and in line with company performance.
• Composition of the board of directors: The diversity and competence of board members, as well as their ability to guide the company effectively.

How are ESG indicators evaluated?

Implementing ESG indicators is the first step in a long process that companies must follow if they want to improve their sustainability performance. Evaluating the indicators is a key phase of this process, and can itself be divided into several key stages:

1. Collecting data

The first step for a company in evaluating ESG indicators is to collect relevant data. Data sources may include internal reports, environmental audits, and focussed surveys. It’s crucial to ensure that data is accurate and complete, as this allows for the proper assessment of sustainability performance.

2. Establishing KPIs

Once the data has been collected, the next step is to define key performance indicators (KPIs) that line up with each ESG criterion. For example, a KPI on greenhouse gas emissions could involve setting clear emissions’ reduction goals, such as reducing CO2 emissions by 20% over the next five years. By setting appropriate KPIs, companies can continually monitor their performance, allowing them to identify areas for improvement and adjust their strategies accordingly.

3. Producing sustainability reports

Preparing sustainability reports is a fundamental step in the ESG assessment process. Keeping with our previous example of greenhouse gas emissions, reports in this case would need to transparently and accurately communicate the company’s performance in achieving its emissions reduction goals. Doing this involves providing detailed information on initiatives, milestones, and areas of weakness, so that stakeholders have a chance to evaluate the effectiveness of the strategies implemented. Ensuring transparency in reporting also increases trust in a company and enhances its reputation.

4. Preparing a comparative evaluation

Finally, companies should always aim to measure their ESG performance against industry standards and best practices. Returning to our example, this would mean comparing the company’s current emissions with those of other companies in the sector, and also with benchmarks set by externally recognized sustainability organizations. Benchmarking helps organizations to identify any gaps, as well as areas of strength and weakness. Additionally, it provides an outside perspective that can be invaluable when it comes to fine-tuning ESG strategies.

The advantages of implementing ESG indicators

There are a host of advantages to implementing ESG indicators. Some of the most important include:

• Enhanced corporate reputation.
• Mitigates a range of environmental, social and governance risks.
• Gives access to capital in the form of investments, or access to credit from sustainable institutions.
• Builds trust and long-term value.

The challenges and limitations of using ESG indicators

When implementing ESG indicators, it is possible to encounter various challenges and limitations. Some of the main ones include:

• Difficulty in obtaining accurate and verifiable data.
• Defining KPIs that truly reflect performance.
• Offering full transparency in reports.

As you can see, ESG indicators are essential for modern companies that want to operate in a responsible and sustainable manner. By implementing and measuring these criteria, organizations can position themselves as sustainability leaders, improve their reputation, and contribute to a more equitable and sustainable future. Are you eager to start implementing and measuring your sustainability impact? isEazy ESG offers you a comprehensive solution — boosting your sustainable culture through training, gamification, missions and evaluations, and all in the palm of your hands. Request a demo, and try our sustainability app today!