ESG Reporting: Tracking Your Critical Metrics

August 25th, 2021 by Dakota partner, Scope 5

Determining which ESG metrics an organization should track is one of the most important issues facing practitioners today.

The breadth of metrics is large. Basic activities that generate emissions are obvious places to start. Typical examples are electricity, stationary combustion, mobile combustion and fugitive emissions.

But the real question is which one of these metrics, or perhaps others, are “right” for your organization? Does a metric represent a significant portion of environmental impact, and, if so, is there anything you can do to reduce usage or change activity?

For example, a hospital may use desflurane as an anesthetic for surgeries and procedures. Replacing desflurane with an eco-friendly substitute will lower greenhouse gas. But if your operation uses water as a major product ingredient, then it may be hard to materially reduce water use. And you likely can’t change the source or corresponding emissions if it’s supplied by a local authority.

Sustainability Reporting is Evolving

Despite record reporting submissions to organizations like Carbon Disclosure Project (CDP) and Global Resource Institute (GRI), and more companies publishing sustainability reports, the practice of sustainability reporting remains relatively nascent.

Readers of corporate sustainability reports want to see companies provide direct and useful information about their sustainability impacts and what actions are being taken. A common miss is how key sustainability impacts are addressed in operations.

For example, although many may report onsite fuel, corporate fleets, business travel, energy purchased from utilities, and even employee commutes, they often don’t include metrics on water, waste, procurement, toxins, or supply chain impacts because those categories are not required under many reporting schemes.

But these may contribute significantly to an organization’s environmental footprint.

“Metrics” Should Drive The “Report”

Metrics-driven transparency can help businesses both internally and externally. Externally, reporting ESG metrics will help to increase transparency for stakeholders. Internally, tracking and reporting sustainability metrics ensures results.

Whether for public consumption or not, tracking the “right” metrics is a way to achieve cost savings and reduce environmental impact. They reveal information on poorly functioning products and systems so steps can be taken to calibrate or redesign. Otherwise, companies will lack the sustainability data they need to evaluate and improve their practices.

Shift from Disclosure to Performance – A Positive Development

Although replete with pitfalls and challenges, sustainability professionals often focus on data collection at the expense of structural improvements in performance.

This brings us to the doorstep of why materiality matters.

A Critical Link for ESG Strategy

The issue of materiality is central to determining which ESG metrics are prioritized.

As you can imagine, this cuts to the core question of what to report, and how. Determining which metrics are material and which aren’t requires a stakeholder engagement process to gather insight on the relative importance of specific environmental issues.

A common sustainability reporting pitfall is having incorrect ESG data for emissions and resource consumption or approaching sustainability communications as a public relations exercise. The issues identified as material may touch every aspect of a company’s business model or may have gone unnoticed. They are often valuable inputs to strategic planning, operational management, and capital investment decisions.

Let’s Use Carbon to Illustrate Materiality

Many companies already report on carbon management because they believe climate change may be an important issue to their stakeholders. Capturing quantitative stakeholder feedback on carbon can validate or change that reporting strategy, but the value-add is realized when the carbon data is viewed through operational and financial perspectives.

For example, analyzing carbon in the context of production efficiency and EBITDA helps a company understand how its business model would be affected by a price on carbon. If the carbon footprint of a production facility or product is a significant market driver, then the company can assess its risk-to-hold value of its current assets, and inform business and financial planning, such as where to best allocate its OPEX budget towards operational improvements, or its CAPEX towards R&D and innovation.

In this example, a rich data set on stakeholder perspectives further informs investment decisions that are based on the carbon impact of competing products. It’s easy to see how this data can affect the approach to risk management, operational management systems, product development, R&D, marketing and stakeholder communications.

ESG Reporting Software That Tracks Your Metrics

Since the materiality of ESG metrics varies by company or organization, having a tool that can support your business and process is a must-have.

Flexibility and configuration are critical. With a cloud-based reporting application, new categories of data can be added and can be configured with detailed parameters around each category in a manner that supports specific business processes. This exercise should not require a team of experts to customize the application but should be doable with a few clicks, by any authorized user.

For example, a cloud-based application can give the data provider flexibility in data entry, while simultaneously restricting users to a common format, such as requiring monthly data rather than annual.

When the data is resident in a relational database and accessible through a quality application, users with different needs and interests can chart one variable as a function of another. The result is fine-grain analytics that support critical business decision-making.

For example, a user might decide to chart their facility’s usage relative to other facilities. If the application stores the area of each facility, that user can chart energy per square foot for each facility. Such a chart reveals facilities that are using much more energy per square foot than the average (or much less). This leads to energy and cost savings.

Conclusion

The importance of using materiality to drive corporate sustainability strategy is growing. Investors demand more disclosure. Global reporting frameworks like GRI include guidance on assessing materiality. There are no “right” or “wrong” sustainability metrics, only those that make the case to senior management on why and how to report sustainability and other non-financial data that have a direct impact on the business. Software tools like Dakota Metrics can help you track the metrics that matter, whatever they are.