The list of ESG requirements from a wide variety of sources is long and growing – and varies greatly from industry to industry. Let’s therefore limit ourselves to the five most important quantitative ESG indicators for every company. Companies that can reliable report on those five have made an important first step.
Rating agencies like MSCI, Sustainalytics or ISS analyze hundreds of ESG data points from a company. On top, there are extensive requirements of ESG standards and frameworks such as GRI, SASB and TCF – and that’s without even mentioning growing legal requirements. Especially companies that are just getting started with their ESG reporting can quickly feel overwhelmed: where should they begin?
That is why I list below the five ESG indicators that are most relevant for any company – irrespective of its industry. And I’ll add some brief hints for you on how to approach each ESG indicator:
1) Energy Usage
The absolute energy consumption of a company is calculated adding up electricity consumption, heating energy consumption (mostly natural gas) and energy consumption from fuels (e.g. for the own transport and company car fleet). The sum of these consumptions for an entire year is usually indicated in MWh (less frequently: in GJ) and can be communicated as “energy intensity” when put in relation to total sales.
Electricity and natural gas consumption can be calculated without major problems using the energy providers’ billing statements. The only challenge: the bills may not arrive in time for the annual reporting. Companies that publish their ESG reporting as early as March or April should therefore contact their energy providers early up front to receive the consumption information in time.
The calculation of energy consumption from (liquid) fuels is trickier, as many companies don’t track exact fuel consumption. Many companies therefore omit this factor from their energy consumption statistics, thus not providing a 100% complete picture of their energy consumption.
Other ESG indicators are closely related to absolute energy consumption. These include, for example, information on the amount of self-produced energy (e.g. from own solar plants) or the share of renewable energies in total energy consumption.
2) CO2 emissions
Probably THE ESG indicator par excellence: a company’s CO2 emissions. No matter if a company’s own business model is CO2-intensive or not: The vast majority of stakeholders expect figures on CO2.
Strictly speaking, however, we are dealing with not one, but three figures: namely, the three “scopes” according to the international Greenhouse Gas (GHG) Protocol:
- Scope 1: CO2 emissions of a company from direct business activities (e.g. emissions from the company car fleet).
- Scope 2: Indirect CO2 emissions of a company resulting from the purchased electricity (e.g., if coal-fired electricity generation is involved).
- Scope 3: Indirect CO2 emissions of a company from the upstream and downstream value chain (e.g. mining of raw materials, sale of manufactured goods)
Scope 1 emissions are quite easy to calculate using established calculation methods and agencies. So are Scope 2 emissions that can be derived from the electricity mix a company uses. Scope 3 emissions, however, often require more complex calculation models and more data. Therefore, according to the WEF ESG standard, estimated values are currently sufficient for Scope 3 emissions.
In terms of CO2, specific targets and the issue of CO2 neutrality also play a role.
More and more companies are committing to CO2 reduction targets, often with the help of the non-profit Science Based Targets Initiative. Science-based targets are often ambitious because they are supposed to be in line with the 1.5°C target of the Paris Climate Agreement. The reward are positive scores in novel climate change ratings, e.g. from MSCI or Arabesque.
When it comes to CO2 neutrality, most companies are currently focusing on offsetting existing CO2 emissions. To do this, they buy certificates from third-party suppliers, which are supposed to prove that the same amount of CO2 has been saved elsewhere. However, this practice is increasingly criticized as being ineffective.
3) Female Quota
One of the most straightforward ESG indicators of all: What was the share of female and male employees in the reporting period? But be careful: while HR departments can usually find this information very quickly, the figure often carries a certain risk. This is especially true if the share of women in a company is rather low – which is the case in some rather “male-dominated” industries. Companies that are “affected” should therefore always show their female quota in comparison with the rest of the industry.
Stakeholders of all colors also welcome a plausible presentation of the plan to increase the proportion of women in the company – for example, through targeted measures to attract more female applicants. Eine plausible Darstellung des Plans, den Anteil von Frauen im Unternehmen zukünftig zu erhöhen, wird von Stakeholdern ebenfalls gerne gesehen – beispielsweise durch gezielte Maßnahmen zur Ansprache weiblicher Bewerberinnen.
Exemplary companies also indicate the proportion of women at the first two management levels and on the supervisory board. For the latter, a female quota of 30% has already been in force in Germany since 2016 for large listed companies that are subject to the German “Mitbestimmungspflicht”.
4) Training Hours
This social indicator is also quite self-explanatory, although it is somewhat more difficult to collect than the proportion of women. The reason: training hours are often not being tracked.
WEF sees training hours per employee as one of the most important indicators for all companies to underline their employee development efforts. As a first step, companies should therefore at least provide well-founded training hour estimates.
Closely related to this indicator are the training expenditures per employee, which standards and frameworks usually ask for in the same context as training hours.
5) ESG as Part of the Management Remuneration
Admittedly, this indicator is not yet a must-have for companies. But it does show a clear ESG commitment on the part of the board if ESG is part of its compensation. Investors and rating agencies reward this ESG indicator accordingly.
What exactly is this indicator about? More and more companies are making the achievement of specific ESG targets part of the variable executive compensation. Concrete targets can be, for example, a specific amount CO2 emission supposed to be as low as possible (BASF) or the share of sustainable articles in the product portfolio (Adidas).
Accordingly, pressure is also growing on smaller listed companies to establish meaningful ESG components in management remuneration schemes – and to afterwards communicate them transparently.
Would you like to effectively collect the top five ESG indicators (and countless others) in your company and establish a sound ESG reporting? Then please feel free to contact us and find out how we can effectively support you in this.
