As a company that designs ESG software and regularly advises leaders on ESG strategy, we're often asked what's the best way to set and measure ESG KPIs (key performance indicators). ESG is cross-functional by nature, encompassing a wide range of ESG metrics and data around a company’s sustainability, value chain, employees, governance, risk management, and other aspects of its operations. As a result, an ESG KPI strategy needs to be just as comprehensive. It should enable clear operational performance measurement and reporting around a company's most material ESG topics, without over-burdening an organization with too much complexity, administrative work, or micro-management.
In most cases, effective ESG KPI design, operational measurement, and performance go hand-in-hand. Being able to make a strong business case for ESG initiatives (and their outcomes) - then backing up your ESG ROI case with compelling measurement and reporting - is the best way to win executive buy-in and mindshare, while also making your performance clear to investors, employees, customers, and other key stakeholders.
ESG stands for Environment, Social, and Governance, often described operationally as environmental social governance
ESG outlines broader macroeconomic, environmental, and cultural issues that impact a company's performance, value, sustainability, and risk profile. This includes environmental considerations like the impact of climate change on a company's supply chain, social issues like diversity, equity, and inclusion (DEI), and corporate governance areas like board accountability, ethics, compliance, and transparent reporting.
ESG has become increasingly important as investors, regulators, and customers seek companies that demonstrate sound financial decision-making and business performance while contributing [more] positively to the environment and society. Companies that focus on ESG typically show better employee retention and lower turnover rates. Sustainable brands often price at a premium versus competitors and improve margins. Energy efficiency investments and circular business model innovation can reduce energy use, emissions, and operating costs.
But, as the old management saying goes: "you can't improve what you can't measure." As a result, companies looking to establish and improve their ESG performance need clear KPIs to track and report performance. Similarly, investors are continually looking for material, standardized ESG performance indicators that can be used to compare and benchmark companies. The more data-driven your ESG implemention becomes, the better positioned your organization will be to guide and incentivize improvements, issue transparent ESG reporting, and manage risk.
In our work with ESG leaders and teams, we typically recommend and work around a 5-step KPI design process:
Your ESG KPIs should reflect your brand, business model, and value chain. For example, if you’re a technology company, energy usage and greenhouse gas (GHG) emissions from your servers should be a priority carbon accounting KPI. You should also set KPIs around employee and board-level diversity. By comparison, an apparel company might operationally focus on sustainable sourcing and procurement, social compliance, water stewardship, and Scope 3 emissions from its supply chain, because those are most material to its sector.
A thoughtful, thorough Materiality Assessment process can be a helpful initial step in designing ESG KPIs (all of which can be encoded into Brightest's software for easy data collection, performance tracking, and stakeholder communication)
Look at your company's business model, brand, and purpose: ESG KPIs should build off that foundation and be a vehicle for positive organizational, environmental, and social change and performance improvement. Your materiality market screen should analyze industry benchmarks, peers, and ESG standards, which will help provide an initial universe of KPIs to select from.
For more on ESG materiality, please read our guide here. Or feel free to contact us directly for materiality help or questions.
Once you’ve established your material ESG themes and topics, work with different stakeholders in your organization - finance, operations, supply chain, HR - to design a focused set of KPIs to track them. These indicators should be based on ESG reporting standards, ratings methodologies, and peer benchmarks. For example, a leading global beauty brand tracks 40 top ESG KPIs across its business, with different department leads responsible for specific metrics. A smaller company or startup will likely want a narrower focus.
In many ESG areas, there are already established, industry standard KPIs. In environmental sustainability, measuring greenhouse gas emissions (GHG) in Scope 1, 2 & 3 emissions of carbon equivalents (CO2e) generated from operations is an established, material indicator and carbon accounting approach. For most companies, annual, quarterly, or even monthly Scope 1, 2 & 3 GHG emissions is a KPI that should be tracked.
Sustainability teams should also track KPIs around:
On the social side, EHS (Environmental Health and Safety), HR, CSR, and employee demographic data also have established KPIs. Common examples include:
Common ESG governance KPIs companies should be tracking include:
Make sure to always select KPIs that are material and relevant. For example, employee volunteering participation could be a helpful indicator for employee engagement, but likely not for community impact or overall ESG performance, as there are often better ways your organization can help vulnerable communities or report impact. When ESG KPIs aren't material (and then get communicated publicly) it raises the risk of provoking external criticism for "greenwashing" or being insincere. The more your ESG initiatives and communication efforts focus on material change and credible KPIs, the stronger your ESG reputation will be.
Similarly, rather than trying to boil the ocean or appease everyone, focus on doing (and measuring) a few specific KPIs well, then build from there.
While you know what's best for your business or brand, often your partners (ex: non-profits, suppliers, third party experts, independent standards organization, or an ESG measurement firm and system like Brightest) can provide helpful best practices for setting ESG KPIs and performance targets. This is one of the main reasons we invest so much in supporting cross-organizational collaboration inside our ESG platform. Whether it's internal collaboration and cross-team data gathering, social impact between a company and its non-profit partners, or environmental data from supplier engagement, the theme's always the same: it's always some combination of hard, slow, or an incomplete picture pulling together your ESG data and reporting in a silo. Positive internal and external relationships are critical for ESG measurement success.
Be sure to listen, collaborate, and engage your partners throughout the measurement and KPI conversation.
Most ESG professionals understand the relationship between strategy, actions, impact, data, and outcomes. The challenge is creating a consistent process to efficiently get the data you need to measure results, report on success, and reaffirm business performance. The reality is most ESG professionals we know spend way too much time gathering and organizing data. Yes, we need the right data to track our KPIs and create reporting, but we shouldn't spend all our time on that when there are many opportunities for efficiencies.
The more you simplify, centralize, and streamline your data collection, management, and business intelligence capacity, the better decisions you'll be able to make about operational ESG performance, and the more time you'll have to focus on ESG implementation and improvement, rather than just reporting.
In our experience, a system like Brightest can save and automate hours of ESG data work per week to unblock valuable team time and productivity.
Effectively understanding and communicating ESG results and outcomes to stakeholders remains one of the most important responsibilities for any ESG team. Your ESG reporting strategy and KPI approach should be closely tied to your communications strategy: where, when, how, and why are you authentically telling your brand's ESG story? All the pieces need to fit together.
There are a lot of potential channels for ESG storytelling if and when you have the data and performance to back it up: internal communications, annual reports, websites, social media, press, ESG ratings providers - where are you focusing? And does your ESG KPI approach provide credible proof your organization's achieving the impact and outcomes its pursuing (or claiming)?
Wherever you are in your ESG measurement journey, we wish you all the best as you continue making (and measuring) positive impact. If we can be helpful at all (at any step in your process), please get in touch. A central part of our mission here at Brightest is enabling better data-driven decision-making (not to mention actions and communication) for good.