At a glance
- Relevant and transparent ESG reporting builds trust among stakeholders. But inconsistent and varied standards have traditionally hampered the efforts of many organizations.
- Leading ESG measurement frameworks are starting to converge, creating the possibility of a more standardized landscape for tracking and measuring ESG performance.
- Additional ESG reporting regulations will incentivize organizations’ ESG activities and help businesses create value for a range of stakeholders.
The approach that leads to performance
Understanding what’s important to your stakeholders is a key consideration that helps organizations determine which metrics, targets and risks are most relevant. It also helps companies prioritize their efforts.
Businesses that are taking the lead on ESG have adopted a holistic approach that recognizes and incorporates the needs, concerns and interconnectedness of all stakeholders. They’re embedding ESG into strategy, operations and reporting in a transparent manner to build trust across all stakeholder groups.
This involves setting clear targets and KPIs and then developing a roadmap that sets out how targets will be met and progress reported on. This could include, for example, reviewing operations and value chains for exposure to climate change and social unrest, and developing and implementing resilience plans.
ESG performance can be tracked and measured using company-reported data. But evaluating ESG performance can be challenging due to the inconsistent quality of ESG reporting. To ensure reliable ESG disclosures, different sets of ESG measurement frameworks and reporting standards are starting to converge, providing a standardized reporting landscape for further regulation and third-party attestation.
Many countries understand the benefits of incentivizing organizations’ ESG activities and standardizing ESG reporting. The Canadian government has made progress on regulating climate-related disclosures. But there’s an opportunity for Canada to keep pace with its global peers and accelerate progress on a range of policy objectives, such as the United Nations’ Sustainable Development Goals (SDGs), Task Force on Climate related Financial Disclosures (TCFD) and the newly launched International Sustainability Standards Board (ISSB), by further advancing ESG policy across a range of areas.
Objective criteria to track and measure ESG performance
Business performance on important aspects of ESG such as decarbonization, workforce diversity and sourcing products through ethical supply chains can be evaluated and measured. But it needs to be done right. High-quality data requires articulation of a clear ESG strategy, strong execution and access to the data through appropriate tools and technology.
We’ve seen how powerful the outcomes can be when organizations start their journey with clear priorities.
It’s helpful to evaluate potential initiatives based on their ESG impact, ease of implementation and return on investment—both to your own organization and your stakeholders. We’re seeing leading organizations quantify and communicate how their ESG investments are preserving and creating value for investors, employees, customers and regulators. This, in turn, allows organizations to allocate human and financial resources, as well as structure compensation frameworks, in ways that enhance financial performance and deliver meaningful results and confidence to all stakeholders.
Today, a range of objective ESG data, metrics and criteria can be used to track and measure ESG performance across industries and businesses. A range of stakeholders rely on company-reported ESG data to help assess investment opportunities, select suppliers and inform other important decisions. This reliance on ESG disclosures—and the associated evaluation challenges—are driving reporting to become more standardized. We’re seeing several third parties—including S&P Global, MSCI and Refinitiv—establish their own ESG frameworks and methodologies that allow ESG performance data to be evaluated in a comparable way.
The table below lays out an ESG framework that can help measure and score businesses on ESG performance. While not exhaustive, the framework provides a lens through which to understand the breadth of ESG concerns and issues that businesses are measured against. In addition, the key areas of focus are designed to be aligned with the United Nations’ SDGs.
ESG framework: Areas of focus
| Decarbonization |
|---|
| Carbon emissions |
| Green products/infrastructure |
| Green operations |
| Clean tech |
| Water scarcity |
|---|
| Water consumption |
| Water recycling |
| Waste and pollution |
|---|
| Pollution emission |
| Waste disposal and diversion |
| Energy consumption |
| Renewable energy |
| Packaging |
| Biodiversity fostering |
|---|
| Land use |
| Land preservation |
| Water preservation |
| Sustainable supply chain |
|---|
| Supply chain transparency |
| Sustainable procurement |
| Sustainable materials |
| Workforce |
|---|
| Diversity and inclusion |
| Equality |
| Human capital development |
| Health and safety |
| Human rights |
|---|
| Supply chain labour standards |
| Community |
|---|
| Infrastructure investment |
| Community empowerment |
| Product responsibility |
|---|
| Product safety |
| Data privacy |
| Cyber security |
| Responsible AI |
| Management |
|---|
| Board structure and actions |
| Management compensation |
| Anti-corruption |
| Ethical business model |
| Corporate behaviour |
|---|
| Transparency and reporting |
| Risk and compliance |
| Accountability/ownership |
| Partnership |
The value of getting ESG right
Organizations that get ESG right provide direct and indirect benefits to a broad set of stakeholders. This, in turn, brings positive outcomes to the business itself and creates a virtuous circle that benefits companies, stakeholders and society alike:
Consumers have greater product choices, improved product quality and better customer experiences at a reduced cost. For example, Patagonia customers receive enhanced after-sale service options such as return or repair options as part of the retailers’ initiatives aimed at encouraging recycling and reducing waste.1
Investors and lenders safeguard superior long-term returns from more sustainable investments while being less affected by risk and volatility. Notably, Morgan Stanley found sustainable funds outperformed their peers by a median of 2.8 percentage points in 2019. But the difference was even more significant amid the turbulence of the COVID-19 pandemic in 2020, when sustainable funds outperformed traditional funds by 4.3 percentage points.2
Internal stakeholders—particularly underrepresented minorities and people with disabilities—receive more resources, better working conditions and greater economic stability. For example, a multinational card payment service provider’s ESG strategy includes a commitment to double its annual spending with diverse and minority-owned suppliers in the US in 2019 to US$750 million by 2024.3
Governments and regulators experience reduced regulatory complexity, lower fiscal expenditures and improved societal stability. In particular, businesses with strong ESG performance can help governments meet their own carbon reduction and sustainable development commitments.
The virtuous circle of benefits created by getting ESG right provides an opportunity for Canada to accelerate its progress on ESG policy. Further regulation of ESG reporting will incentivize ESG activities, helping to realize these benefits and advance toward our economic, environmental and social objectives.
1 “How We Extend the Functionality of Your Gear—and Repair It,” Patagonia, accessed April 19, 2022, https://www.patagonia.ca/stories/extended-play/story-32985.html.
2 “Morgan Stanley Sustainable Reality Report Reveals U.S. Sustainable Funds Outperformed Traditional Funds by 4.3 Percentage Points in 2020,” Morgan Stanley, published February 24, 2021, https://www.morganstanley.com/press-releases/morgan-stanley-sustainable-reality-report-reveals-u-s--sustainab.
3 American Express Announces $1 Billion Action Plan to Promote Racial, Ethnic and Gender Equity for Colleagues, Customers and Communities,” American Express, published October 29, 2020. https://about.americanexpress.com/newsroom/press-releases/news-details/2020/American-Express-Announces-1-Billion-Action-Plan-to-Promote-Racial-Ethnic-and-Gender-Equity-for-Colleagues-Customers-and-Communities-10-29-2020/default.aspx.
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