Environmental, Social, and Governance (ESG) is a framework used to evaluate a company’s non-financial performance across three broad areas. ESG factors allow investors and stakeholders to assess an organization’s long-term sustainability and ethical impact. The metrics are the quantitative data points and disclosures used within this framework to measure and report on corporate behavior. These indicators have become a central focus in modern business and investing, reflecting a greater consideration of non-financial risks and opportunities.
Defining ESG: Environmental, Social, and Governance
The Environmental pillar focuses on a company’s impact on the natural world, including its operational footprint and resource management. This encompasses the firm’s energy consumption, waste generation, pollution, and the steps it takes to mitigate climate-related risks.
The Social pillar centers on a company’s relationships with people, including its employees, suppliers, customers, and the communities where it does business. This area examines labor practices, issues of equity, human rights, employee health and safety, and community engagement.
The Governance pillar concerns the internal systems of a company, including its leadership, executive pay, internal controls, and shareholder rights. Effective governance ensures accountability, transparency, and ethical decision-making within the organization. This element assesses the integrity of a company’s structure and its processes for overseeing decisions.
Why ESG Metrics Matter
ESG metrics provide a structured way for investors to conduct risk assessment. Companies with poor ESG performance often face higher operational risks, such as regulatory fines, supply chain disruptions, or reputational damage, which can translate into financial instability. Investors increasingly use these data points to screen potential investments and allocate capital toward businesses deemed more resilient.
The relevance of these metrics extends to consumers, who increasingly align their purchasing decisions with their personal values. Strong ESG reporting allows consumers to verify a company’s commitments and avoid products or services from organizations perceived as harmful or unethical. For employees, a strong ESG profile can be a significant factor in recruitment and retention, as workers seek employers whose values and practices align with their own.
The Environmental Pillar (E) Metrics
The Environmental pillar relies on specific, quantifiable data to measure a company’s ecological impact. A standardized metric is Greenhouse Gas (GHG) emissions, categorized into three scopes to cover all sources. Scope 1 includes direct emissions from sources owned or controlled by the company, such as vehicles or manufacturing processes.
Scope 2 covers indirect emissions from the generation of purchased energy, like electricity or heating, consumed by the organization. Scope 3 accounts for all other indirect emissions that occur in a company’s value chain, such as those from business travel, employee commuting, or the use and disposal of sold products, often representing the largest portion of a company’s total footprint. Companies also track total energy consumption, detailing the percentage derived from renewable versus non-renewable sources to measure the transition to clean energy.
Water usage and stewardship are measured through metrics like total water withdrawn, consumed, and discharged, particularly in water-stressed regions. Waste generation is tracked by total mass of waste and the percentage diverted from landfills through recycling or reuse. Tracking biodiversity impact, such as operational sites near protected areas, provides another layer of environmental accountability.
The Social Pillar (S) Metrics
Social metrics quantify a company’s performance in managing its human capital and external social relationships. Diversity, Equity, and Inclusion (DEI) data is measured by tracking the percentage of gender and ethnic representation across organizational levels, from entry-level positions to senior management. The employee turnover rate provides an indication of workforce satisfaction and stability, with higher rates often signaling poor working conditions or low engagement.
Employee health and safety are quantified using the lost-time incident rate (LTIR), which measures the number of workplace injuries that result in time off per a specified number of hours worked. Companies also report on total training and development hours per employee. Metrics related to labor practice compliance, such as the percentage of the workforce covered by collective bargaining agreements or the number of non-compliance incidents regarding child labor, are included in the ‘S’ pillar.
Community involvement is measured through quantifiable metrics like the total amount of charitable donations or the number of employee volunteer hours. These social metrics extend into the supply chain, where a company tracks the percentage of suppliers screened for social criteria and human rights issues. Data on pay equity, such as the ratio of median pay between genders or ethnic groups, also falls within this pillar.
The Governance Pillar (G) Metrics
Governance metrics focus on the structures and processes that ensure a company is directed and controlled effectively. Board structure is measured by the percentage of independent directors and the diversity of the board in terms of gender, ethnicity, and professional experience. Companies report on the alignment of executive compensation with performance, often detailing the CEO-to-median-worker pay ratio and the extent to which incentives are tied to achieving ESG goals.
Transparency and ethical conduct are measured through the existence and enforcement of anti-corruption policies and the number of confirmed incidents of corruption. The quality of internal audit and control systems is assessed. Disclosure of political contributions and lobbying expenses provides transparency on how a company uses its resources to influence policy. Shareholder rights are often quantified by examining factors such as whether shareholders have the right to call special meetings or the percentage of shareholder proposals supported by the board.
Measuring and Reporting ESG Performance
The collection and presentation of ESG metrics are guided by a variety of global reporting frameworks designed to standardize disclosures. The Global Reporting Initiative (GRI) provides a widely adopted framework for reporting on an organization’s impacts on the economy, environment, and society. The Sustainability Accounting Standards Board (SASB) offers industry-specific standards focused on the financially relevant sustainability issues most important to investors.
The Task Force on Climate-related Financial Disclosures (TCFD) focuses specifically on helping companies disclose information about the financial risks and opportunities related to climate change. Third-party ESG rating agencies, such as MSCI and Sustainalytics, use these reported metrics to generate scores that evaluate corporate performance. These scores help investors benchmark a company against its industry peers.
While many of these frameworks are voluntary, mandatory reporting standards are emerging in various jurisdictions, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD). These regulations aim to enhance the comparability and reliability of ESG data for investors and stakeholders.