What are the Common Methods for Measuring ESG in a Company?

August 22, 2022

What are the Common Methods for Measuring ESG in a Company?

Do you have a company or business and want to see it succeed? Investors, consumers, neighbouring communities, employees, and business leaders are all interested in associating with companies that are focused on sustainability. Therefore, your company should have a strong environmental, social, and governance (ESG) reporting plan and create clear reports for investors and other stakeholders. To prepare these reports, it is also crucial to understand and employ the right methods and data gathering for measuring ESG. 

This post will take a closer look at ESG management to demonstrate why the measurement is important. We will also highlight the best methods of measuring ESG for your company. 

What is ESG Assessment?

Environmental, social, and governance (ESG) measurement is the review of a business or company’s sustainability performance to determine its environmental, social, and governance impacts. It is intended to provide stakeholders, such as investors and customers, with a clear state of your company so that they can compare with other organisations and decide whether to associate with it. So, if your company management adopts a green initiative, such as shifting to solar energy to reduce carbon footprint to reduce environmental impact to improve sustainability, how is it measured? 

As we are going to see shortly, ESG assessment checks all aspects of your company and gives a sustainability score. If you are focused on ESG, investors will want to be associated with the company because their resources will go a long way toward addressing the global challenges facing the planet. 

Special Benefits of Sustainability and Measuring ESG

Before looking at the main methods of measuring ESG, let’s start by checking the benefits. 

  • ESG measurement and reporting are very helpful in cutting down the cost of company operations. 
  • Crucial in helping a company strengthen its brand locally and internationally. 
  • It is very useful for companies targeting winning the support of investors and customers. 
  • ESG assessment and reporting are crucial for compliance with different laws and policies. 
  • Helps companies with long-term strategic planning. 

Methods of Measuring ESG for Your Company 

The following four methods are the most preferred for measuring every environmental, social, and governance (ESG) risk and corporate performance by companies. 

  1. ESG Standard Boards 

This is the commonest method of ESG measurement and management. These standards boards work by defining the accounting principles and requirements to help provide consistency in the reporting of companies’ ESG impacts. This implies that if it is a parameter like cutting down carbon footprint, all the companies using the same board’s guidelines will have the same scoring for easier comparison. Therefore, investors will easily compare the company with better committed managers, ESG sustainability performance, and commitment to addressing long term risks/ impacts . 

Some of the common standard boards on the markets are: 

  • The Carbon Disclosure Project (CDP). 
  • The Sustainability Accounting Standards Board (SASB). 
  • Global Reporting Initiative (GRI). 
  • The Task-force on Climate-related Financial (TCFD).

Remember to check the board that focuses on your industry because some are more specific about the nature of the companies and management that can use them. For example, the Sustainability Accounting Standards Board (SASB) is the most preferred option for companies in the financial sector. If you are unsure of the standards board and framework to work with for measuring ESG and sustainability reporting of your business, consider using the services of those that are more general, such as GRI and CDP. 

  1. Certifications 

There are a number of certifications that you can get to demonstrate your business’s commitment to environmental, social, and governance (ESG) by meeting pre-set standards on financial and product design, among other areas of a company’s operations. The idea is to ensure that companies with quality labels on their brands are focused on sustainability and can be noted more easily at the global and local levels than those without. One example is the Certified B Certification, which is managed by B Lab.  The certification will not only make your business attractive to customers, but also investors at the local and global levels. 

Lab B reviews the entire company or business before accrediting it in a way that people looking for investment or buying opportunities will be able to make quick decisions. If you ask them to help with services such as measuring ESG for your company, they check the production system, workers, recent performance on the markets, customers, suppliers and give recommendations on the needed changes for accreditation. Once you make adjustments, they measure different metrics and only issue certification if your company meets all the set standards. 

  1. Capital Market’s Assessment Guidelines 

If your company is listed or targets listing in top capital markets, from LSE to HKEX, it has to meet the pre-set criteria for ESG performance. Let's take the example of  HKEX, one of the largest capital markets based on trade volumes. In 2020, HKEX issued new ESG guidelines for all companies listed on its platform or new ones that wanted to use its listing services. The ESG guideline is a continuous process that requires clear identification of current impacts by managers, expected challenges in the future, and methods the company targets to use in addressing them. 

The managers are required to be comprehensive and deliver accurate information that will easily be used to make the decisions. With this information even new investment enthusiasts can easily make the right decision about the company to work with because managers have provided all the information for analysis. Therefore, they can even run simulations to measure the company likely to have better financial performance in the long-term. 

Other capital markets, from LSE to NYSE, and individual indices like S&P 500 also have their own ways of measuring ESG. For example, SPX uses the S&P 500 looks at the firms capable of meeting ESG criteria while maintaining the index’s industry group weight. Therefore, make sure to understand the requirements of the markets and stick to the main principles of environmental, social, and governance (ESG) reporting, such as accuracy and materiality. Most investors coming to the capital markets will look at the sustainability reports of firms/ companies of interest to understand their ESG metrics, impacts, performance in relation to international standards before making the final decision. 

Data Accuracy and ESG Measurement 

One thing about measuring ESG is that it is mainly based on data. Whether you are evaluating performance on carbon footprint reduction or support for social justice, stakeholders will want to see information that is accurate and verifiable. Therefore, you need to have a good ESG plan for your company with targeted local/ global goals and key performance indicators. If creating and implementing an ESG plan is challenging, consider getting the assistance or services of professional firms.

The second item that you should have to accurately measure the ESG risks and report in line with the recommended global standards is sustainability reporting software. The app you select should allow you to stick to your sustainability plan, gather data on different ESG risks, prepare the final reports accurately and win the affection of the company’s stakeholders. With a good app, such as diginexESG and climateESG, managers can even automate some parts of data gathering. For example, firms can integrate the selected app with the company management system so that it can automatically pull out some data on financial performance and other sustainability metrics.  

This post has demonstrated some of the best methods of measuring ESG that you should consider for your firms or companies. Remember that ESG implementation will only be effective when it is fully integrated into your company’s corporate strategy, and using the right data to measure financial, environmental, social, and other ESG risks. Consider working with an ESG expert to help with sustainability strategy formulation and implementation, and application of the best software. Contact our experts at Diginex.com for the best ESG sustainability reporting app and professional assistance. 

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