As an investor screening tool, ESG frameworks determine the willingness of investors to buy shares in a company. Thus, poor environmental scores within ESG criteria could mean fewer investors. Fewer investors hinder a company’s ability to thrive and overcome obstacles. This article examines ESG environmental criteria and how companies can optimize their ESG strategy.
What Is the “Environmental” in ESG?
The “environmental” in the ESG approach measures a company’s environmental responsibility. All activities across a company’s direct operations and supply chains are relevant for ESG environmental evaluations. ESG criteria evaluate both outputs — what and how much a company produces — and inputs — what and how much they use to sustain production.
While not exhaustive nor unique to ESG environmental factors, some cursory evaluative factors with ESG environmental criteria include:
- Carbon footprint and sustainability practices
- Material disposal and waste
- Future environmental goals
- Corporate climate policies
- Use of natural resources
- Treatment of animals
- Pollution metrics
There are also industry-specific evaluative factors, which often apply to the medical, utility and food industries.
How Do You Choose the Right ESG Performance Metrics?
In the environmental sector alone, there are many ESG performance metrics. With so many performance metrics, it becomes unrealistic for companies to give 100% of their attention to each metric. In some cases, specific metrics will be more relevant to a company’s operations than others. Thus, it’s essential to know what metrics to focus on, but they’re not always clear.
It takes expert analysis to decipher essential ESG performance metrics from bonus metrics that provide an edge over the competition and metrics that are somewhat irrelevant to company operations. Still, ESG reporting standards are becoming stricter. Investors interpret clear, consistent company reporting as signs of transparency and accountability. As such, choosing the right ESG performance metrics involves more than posturing or saying the right thing at the right time. Companies must take an active role in engaging with environmental issues and determine their role in mitigating them.
One strategy for choosing the right ESG performance metrics is paying attention to pillar environmental concerns. Such pillars group performance indicators together, distilling ultimate aims and finding common denominators between them. It’s also beneficial to pay close attention to the data points and frameworks your stakeholders focus on.
Paying attention to pillar concerns and stakeholder interests prevents companies from getting bogged down by the minutiae of each metric. By scaling out, companies can highlight relevant operational KPIs before scaling in to optimize their ESG score. In this way, companies can give greater intention and care to the metrics relevant to their operations and stakeholder interests.
Guide to Possible ESG Environmental KPIs
Here are some environmental pillars and specific environmental KPIs to consider when determining which ESG environmental performance metrics to focus on.
Environmental pillars come in different formulations, depending on the priorities of those who codify them. However, here are three fundamental pillars for ESG environmental performance metrics:
- Greenhouse gas (GHG) emissions: GHG emissions are foundational to assessing your carbon footprint. They damage the climate by trapping heat close to the earth’s surface, contributing to global warming and poor air quality. Carbon dioxide, methane and nitrous oxide are the primary greenhouse gases released during fossil fuel combustion. Companies can develop effective carbon reduction strategies and reasonable cost estimates for optimizing their ESG score by taking inventory of GHG emissions.
- Land protection: Land trusts guard land with rich biodiversity from industrial development or devastation. Depending on a company’s industry, this pillar may be more or less relevant. Companies that produce much waste or plan to develop or extract resources from biodiverse areas need to consider this pillar more than companies with minimal waste and sustainable development. Land protection also has implications for ESG social criteria, such as indigenous land rights.
- Water use: This pillar is easy to overlook but requires careful reflection. Water insecurity is rapidly increasing across the world. Water crises are ranked fourth on the World Economic Forum’s (WEF) Global Risk Report, behind weapons of mass destruction, failure of climate change mitigation and extreme weather risks. According to the United States Geological Survey, industries that produce chemicals, gasoline, metals, oils, paper and wood use the most water.
Specific Environmental KPIs
Understanding the ESG environmental pillars can make prioritizing specific environmental KPIs more manageable. Of those KPIs, here are some companies commonly encounter:
- Energy consumption and efficiency: This metric determines a company’s total energy consumption across direct operations and supply chains. Energy efficiency is based on total consumption and the extent of company operations. Energy consumption includes process and assembly, heating and cooling, lighting and other industry-specific factors.
- GHG emissions: Another environmental KPI is a company’s total GHG emissions. Contributing factors to a company’s GHG emissions include transportation, electricity production and chemical reactions from raw material processing.
- Energy use per facility and enterprise-level: This metric breaks down energy consumption across a company’s different facilities and operations. It outlines where they score well with energy efficiency and where they have room to improve.
- Ratio of expected energy saved to actual use: This KPI measures how efficient a company’s energy strategies are.
- Greenhouse emissions from energy used: This metric involves indirect GHG emissions, which are emissions from purposes indirectly related to a company’s primary operations. Such emissions include burning fossil fuels for heating and other energy needs.
- Waste creation: The amount, type and disposal methods of waste a company creates are relevant to environmental ESG criteria. Construction industries make the most waste, but textile manufacturers make much more toxic waste. So, it’s a matter of how much as well as what type of waste is created and what is done with it.
- Value added to the economy through cost avoidance: This KPI concerns a company’s ability to continue adding economic value while adhering to sustainable practices. It examines how economically innovative the solutions are to determine if the investment is worthwhile.
- Applicable laws governing environmental responsibility: Adhering to local, state and federal laws regulating a company’s environmental impact affects ESG performance. Taking environmental risks harms ESG scores.
Get Support With Your ESG Strategy From TRC
There are many moving parts to consider when managing a company’s finances. Besides providing consistent financial reportage, CFOs must know where to invest while determining best practices for managing company debt, equity and capital structure. With that responsibility, it’s challenging to devote enough attention to developing an effective ESG strategy. Our global consulting firm at TRC can help you develop an environmentally conscious ESG strategy. Contact one of our ESG experts today to get started!