ESG Metrics: 5 Key Results Criteria to Make Them More Effective

This is the third post of our four-part blog series, written in collaboration with PM2 Consulting's executive partner – Brett Knowles, covering the application of OKRs to ESG initiatives.  

  

Effectively checking, managing, and reporting on your organization's ESG activities requires you to consider several things:  

  • What ESG aspects are you measuring?  
  • How do you measure ESG progress correctly?  
  • Which stakeholders contribute to your environmental impact?  
  • Which ESG metrics are suitable for what type of activities?  

 

This blog post will help you address these complexities by covering the different ESG metrics and highlighting the interrelations of ESG initiatives and Key Results (KR) according to the OKR method. As PM2 Consulting heavily relies on the Future-Fit Business Benchmark (FFBB), we will use it as a framework when discussing this topic.  

  

Why Use ESG Metrics? 

  

Your efforts towards ESG initiatives are not only significant when executing organizational strategy; they can also benefit your stakeholders when:  

  • Demonstrating Leadership  
  • Building a foundation for improvement  
  • Engaging with employees and other stakeholders  
  • Demonstrating progress  
  • Establishing standards or benchmarks  
  • Cultivating a learning-based community  

  

Categories of ESG Measurement

  

There are three significant elements you can measure in an ESG framework:  

  • Inputs: refer to the inputs of your process. For example, if you're measuring energy, inputs include wind, hydro, nuclear, and coal.   
  • Transformations: describe how you're using inputs to produce outcomes. In the case of energy, transformations could refer to the energy efficiency of your processes and your energy wastes. However, this element can also entail breaking down your measures around existing policies or procedures.  
  • Output/Outcome: involves your net output across all measurement areas. Sticking with the energy example, outputs would refer to the energy consumed per unit produced. This element can also measure proportional progress, post-process recovery, and absolute elimination.  

  

Create Valuable ESG Metrics Using 5 KR Design Criteria

  

After solidifying the ESG elements you want to measure, you can start designing your key results. To make your key results applicable and usable, ensure they meet the five criteria stipulated below.   

 Calculable  

  • You should be able to obtain all the necessary data to compute a KR's value – even if other companies aren't capturing it.  
  • KRs should be calculable even when you don't fully understand their impact (e.g., you don't know the source of purchased materials). KRs should therefore account for knowledge gaps.  
  • KRs should encourage companies to close knowledge gaps. As such, KRs should not penalize increased knowledge (e.g., finding out that a product generates a negative impact shouldn't improve nor lower your company's score).  

Comparable 

Complete 

  • Each KR should consistently measure performance across the value chain, accounting for companies of different sizes and activities undertaken by or on behalf of the business.  

Concise  

  • KRs should consistently measure the performance of companies operating in different sizes or industries to ensure they uncover areas that need help.  
  • KRs should consistently measure performance across companies operating at different sizes, industries, or fitness levels to allow their scores to be weighted by their overall contribution to the business.   
  • At both micro (per-entity) and macro (company-wide) levels, KRs should consistently measure performance across companies running at different sizes and industry percentages, with an industry percentage of 100% affirming a business as fully future-fit.  

Credible   

  • KRs should build on leading science and accurately capture the 'spirit' of the goal they're measuring.   
  • KRs should draw on reputable third-party resources (e.g., industry standards) while aligning with an ESG framework.  

  

A Look at Future-Fitness, Footprint Metrics, and Contributors

  

When measuring your KRs, you should understand the concept of a footprint (e.g., carbon or water footprint). These footprint metrics can shed light on a company's environmental impact, yet they can't always depict the whole story.   

For example, you can't tell whose impact is worse in a situation where Company A uses 100'000 liters of water drawn from a rapidly depleting aquifer in a desert and Company B uses 1'000'000 liters of water obtained from desalinated seawater in an area with high rainfall. For a complete picture of their environmental impact, you'd need to know if their footprint jeopardizes species' current and future well-being in the local watershed.  

Suppliers 

Some companies rely on suppliers for certain goods and services (e.g., energy, water, computers, transport, manufacturing equipment, furniture, and accounting services). As such, suppliers are considered jointly liable for their negative impact on the environment.  

There are two types of collaborations with suppliers that can cause environmental damage:  

  • Outsourced Functions: Companies are jointly responsible for the impacts of direct suppliers to whom they outsource vital business functions (e.g., customer support, assembly, logistics).  
  • Product Inputs: Companies who sell goods (or services that require the consumption of goods) bear responsibility for the operational impacts generated during production.

Customers 

Your company's products must be safe for people and the environment. As both your organization and customers handle the environmental and social impacts of the product's use and end-of-life care, your company isn't entirely responsible for the ecological effects that customers can avoid. For example, when a company sells a car powered by a rechargeable battery, the driver is free to use renewable sources of electricity to charge the battery. Therefore, the company shouldn't be held accountable for greenhouse gases emitted by customers who use non-renewable sources.  

Similarly, customers can't control a company's actions. Ideally, your organization would do all it can to ensure that products do not harm. However, you can't guarantee that customers won't use or dispose of your products in an unforeseen manner.   

Employees  

In addition to ensuring a safe and healthy work environment, you should encourage employees to act in a socially and environmentally responsible manner. Ultimately, however, each party is accountable for its own actions. For example, while you can ban smoking at all company facilities to ensure employees aren't exposed to second-hand smoke, you cannot force employees to stop smoking.   

  

As such, while we should hold companies and their employees mutually accountable for their actions, you can't reasonably expect all your employees to behave in a future-ready manner. However, you can reward employees for making future-fit decisions (e.g., by supplying them with non-emission company cars).  

  

The Two Types of Outcome-Related ESG Metrics  

We can use the following two types of outcome-related ESG metrics to assess progress where possible: 

Proportional Outcome ESG Metrics 

Proportional outcome ESG metrics capture how closely your organization’s outcomes align with ESG goals. For example, paying employees a living wage can be seen as a proportional outcome metric and can be expressed using a simple ratio that compares the number of employees paid at least a living wage to the total number of employees.    

Elimination Outcome ESG Metrics  

Elimination outcome ESG metrics gauge whether you’ve eliminated a negative impact. Yet, measuring this isn't always straightforward. One example of this complexity is if you aim for net-zero greenhouse gas emissions: what level of greenhouse gas emissions do you class as net-zero? In such cases, you need to assess relative anchor performance.  

 

For example, you can use a reference value to match the minimum legal requirement in areas where regulations exist (e.g., GHG emission standards for cars). As such, you’re only rewarded when your emissions are less than the bare minimum.  

  

While it's important to acknowledge that some negative impacts are challenging to eliminate, having a growing company shouldn't excuse environmental damage. Mars Inc.'s objective to reduce greenhouse gas emissions to zero stated: "If we choose to grow our business in ways that require us to produce more products, that is our responsibility to deal with, not the atmosphere's."   

  

Policy and Process Metrics  

  

When you can't measure progress toward ESG outcomes, you should investigate how effectively and systematically issues are being managed throughout your organization. You can do this by looking into:  

  • Commitment: Evaluating how committed your company is to ESG practices.  
  • Policies and Programs: Looking into the policies and programs you've introduced to achieve ESG progress. For example, you can assess the mechanisms you've implemented for employees and communities to report concerns. 
  • Transparency: Assessing your organization's transparency is vital to some goals (e.g., tax and lobbying) as external stakeholders should be able to judge your company's progress.  

  

Wrapping Up 

  

Your company’s responsibility to the environment is not dependent on its size, industry, or activities; ESG policies and processes apply to all organizations, from SMEs to large enterprises. As such, you should track your organization’s carbon footprint and establish methods for reducing this.   

  

While there are debates on how much employees, suppliers, and customers contribute to your emissions, you can rely on ESG metrics and Key Results to get an overview of your carbon footprint. These measurements can help you track your environmental impact across the value chain, allowing you to streamline your organization's journey towards sustainability by making it easier to account for and report ESG progress.   

  

Additional Resources