3 Key Questions to Ask When Defining Your ESG Planning Process

This article is a continuation of a three-part series. Part one defined ESG and its different use cases, part two will explain how these different use cases can lead to financial gain, and part three will dive into how EPM tools such as Anaplan and Workiva can be used to track ESG metrics and reporting.

According to Cornell’s SC Johnson School of Business “ESG funds captured a net $51 billion of new money invested in 2020, more than double the amount in 2019 at $21 billion.” Measuring and tracking ESG is becoming a crucial aspect of business and is something that businesses need to consider to compete in the future. In part one of the article we looked at and defined what ESG is and why it is relevant today. In part two we will be exploring how shifting your approach to business, measuring, and reporting ESG leads to improved performance within a firm through cost reduction, and improved value throughout the firm.

1. What is the best approach to incorporate ESG into your planning / reporting process?

Taking a perspective where your business is viewed from a long term, socially and environmentally responsible standpoint allows the firm to create a more sustainable future for the world, as well as proactively prepare the firm for the future.

ESG impacts your business in many areas—some quantifiable and others less straightforward. Company culture is something that can be hard to measure and quantify but can have drastic impacts on a company’s morale and performance. Policy, structural, and process changes that come with ESG can improve employee satisfaction, reduce costs, and add value to the firm. According to a research article from McKinsey a majority of companies that practiced ESG reporting methods resulted in higher returns.

Reduced Costs
Cost reduction can be implemented in a variety of ways through the analysis of environmental factors, such as water and electricity usage. In depth views in these categories may reveal areas the business is able to cut down or identify unnecessary spending and usage.

Value
Investors are becoming increasingly attracted to companies that implement ESG into their business practices, thus allowing for access to more funds and resources overall improving valuation.

2. What are the ESG metrics that best impact your company’s performance?

Two-thirds of companies in a representative sample from the S&P 500 have more than 10 different sustainability focus topics, and some have more than 30. ESG may seem daunting, but rest assured it’s not as complicated as many believe.

One simple approach is to begin with the reporting metrics that are easily accessible to the organization, such as tracking electricity usage (kWh) and water usage (gallons per bill). Reporting these metrics allows businesses to have a more cohesive understanding of their practices through data observed over time. This allows you to highlight areas you’re able to cut down costs and increase value.

There are many different metrics and approaches you can take—your unique firm and industry factor into developing a specific approach for your business. For example, an airline firm may choose to spend most of their time working on ESG in tracking different types of emissions such as CO2, and nitrous oxide.

Metric #1: Environmental

The metrics you choose and measure will be specific to your firm and industry. The E category will include data that pertains to factors that will affect the Environment. These are a few examples of metrics that are valuable to measure:

• CO2 Emissions
• Water Usage
• Energy Usage
• Renewable energy vs Nonrenewable energy usage
• Waste (where is the waste being sourced to?)
• Percentage of waste being recycled

Taking this data and tracking it overtime may highlight areas in your company where unnecessary or excessive funds are being allocated, this analysis can help in decision making and reducing costs.

Metric #2: Social

Defining a company’s culture is another great way to measure and display your company’s values. Examples of these measurements and data could include:

• Workforce Diversity (Gender, Ethnic…)
• Product Responsibility
• Income equality
• Workforce development

Measuring and reporting workforce diversity helps a company improve their diversity, which is shown to increase performance within firms. Additionally, taking responsibility for the product and ethical sourcing of work increases your firm’s attractiveness to investors who are focused on ESG, as well as reduce risk and improve productivity based on performance from the workforce and customer success metrics of business.

Metric #3 Governance

The governance category pertains to internal matters including Board of Directors, Shareholder rights, code of conduct, and tax reporting. Many changes within the SEC (Securities and Exchange Commission) are beginning to take place. Certain metrics are likely to become reporting requirements in the future. RobecoSAM breaks down and lists various Governance Metrics that are categorized into larger groups:

• Corporate Governance
• Codes of Business Conduct
• Risk and Management Crisis
• Supply Chain Management
• Tax Strategy
• Materiality
• Policy Influence
• Impact Measurement

Within these groups are various metrics that can be tracked and analyzed, for example tenure, executive compensation, diversity, and experience of the board of directors. Some of these other categories are best to track from a qualitative view such as codes of conduct and how systems and procedures within the organization are managed. The governance category boils down to how an institution runs and manages decision making. Standardizing, tracking, and reporting these metrics can assist in a business improving and reducing costs in terms of business and tax strategy, along with allowing for a smoother business process adding value to the firm in the eyes of investors.

3. How will your company report ESG performance?

Organizing your data and reporting is an important step that will allow for better comprehension and data analysis impacting your business decisions. Taking the time to organize the data and understand it properly will ensure you do not use faulty metrics in decision making. Organization will not only help with internal reporting but also financial reporting.

Reporting and displaying data in a manner that will allow for clarity and conciseness enables effective analysis and can provide additional perspective to reveal areas in which the business can be improved, such as cost reduction.

Apart from the internal reporting and analysis, your report can be used externally to investors and others to show that the firm is focused on longevity and being environmentally and socially responsible. This can attract new investors, as well as add value to the firm through displaying their ESG values.

Will your company considering ESG in the near future?

Part 2 of this article series explained how tracking, and reporting ESG can lead to better performance within a firm, along with some ideas and methods of how to get started yourself. As we continue to part 3 of this series, we will discuss the different ways these components can be implemented into EPM tools such as Workiva and Anaplan.