By Dave Crozier
As the saying goes, “What gets measured, gets managed.” A diligent risk management team needs to understand the different environmental, social, and governance (ESG) metrics, as they can help you assess risk within your business value chain. Using the right ESG metrics is an essential part of how your company approaches supply chain issues and working with vendors. Without it, your sustainability strategy may lose its way.
Risk managers can use ESG metrics to gain insights into their vendors’ exposure to environmental and social risks, as well as their governance practices. This information can be helpful in assessing a specific vendor's overall risk profile, allowing risk teams to make informed strategic decisions around their third party risk management procedures.
In this article, we'll discuss what ESG metrics are and how to interpret them. By the end, you'll know how to use ESG data to make more informed operational decisions for your supply chain.
Why Bother With Specific ESG Metrics?
Industry trends show that ESG is more and more often a core part of business strategies and is key to unlocking long-term financial performance. Companies that can flaunt a genuine commitment to sustainability in all aspects of their value chain have the competitive edge in today’s market.
More and more investors want their stocks to align with their personal values. According to a 2022 KPMG report, around 73% of global CEOs see their company’s financial reporting over the next three years being led by corporate purposes. A significant proportion of respondents say this is due to stakeholder demand. The soaring popularity of responsible investing is no surprise.
To help you build trust with key stakeholders and investors, it’s crucial that your business can clearly report on your overall ESG performance to show you’re on the ball in terms of meeting industry standards and regulations. Detailed ESG reporting can show your company is forward-focused in its sustainability efforts — a true win.
Finally, good ESG management lends itself to careful risk management, particularly with third-party suppliers. According to the United Nations Global Compact, at least 70% of a company’s carbon footprint (especially those with complex supply chains) are scope 3 emissions: indirect greenhouse gas emissions (GHG) from third-party sources. Therefore, diligently measuring, monitoring, and reporting on your ESG metrics, especially when it comes to scope 3 emissions, puts you one step ahead.
The Low-Down on ESG Disclosure Standards
Although ESG reporting is voluntary in several international jurisdictions, including the U.S., businesses need to make sure they have the right tools and resources to adjust to proposed regulatory changes over the next few years, as outlined by Deloitte.
With that being said, organizations face several challenges when capturing data for their ESG metrics. First, there are many approaches to ESG disclosure standards, meaning that the scope of reported ESG data can vary wildly between vendors using different frameworks — if they are using any at all.
It’s easy to get lost unless you know how to ask vendors to streamline their reporting methods. To do so, you need to know which frameworks are important for your business. Of the hundreds of different ESG reporting frameworks, the four most prominent are:
- The Global Reporting Initiative (GRI) Standards
- The Sustainability Accounting Standards Board (SASB) Standards
- The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD)
- The World Economic Forum’s (WEF) Stakeholder Capitalism metrics report
Each framework uses a different approach to reporting on the separate metrics, making it difficult to compare the different ESG disclosure reports (yikes). Instead, you should prepare to streamline your sustainability reporting procedures in all areas of your company’s value chain to avoid unnecessary risk exposure.
How to Get a Broader View of Your Vendors’ ESG Performance
As you streamline your reporting procedures, make sure you put workflows in place to gather a variety of forms of ESG metrics. This way, your team can form a well-rounded picture of your suppliers’ ESG performance. For a more holistic approach to ESG reporting, look at both qualitative and quantitative metrics.
You can easily analyze quantitative metrics, like carbon emissions or sustainability scorecards. These metrics can help you see trends and create financial models, making your decision-making processes around vendor management that much easier.
Qualitative metrics, such as public business profiles, details on executive compensation, and interviews on business ethics, are more difficult to compare. However, they provide rich data to help you understand potential risks of working with specific vendors.
Typical ESG Metrics for Businesses With Complex Supply Chains
Earlier, we mentioned that around 70% of a company’s carbon footprint comes from indirect GHG emissions (scope 3 emissions) from the external vendors in its value chain.
Creating a robust framework for tracking all your vendors’ emissions will help you understand where you can make the most impactful decisions to help with emissions reduction — whether that’s by influencing your vendors to take up different practices, or simply doing business with better providers.
For businesses with an expansive supply chain, here are some examples of common ESG metrics that focus on scope 3 GHG emissions:
- Business and employee travel
- Goods and services
- Logistics and distribution
- Health and safety policies and events
- Waste generation and management
- Biodiversity information
- Energy efficiency
Look at your own business model as a starting point to decide which ESG reporting standards to use and which metrics to track.
PwC suggests you choose metrics that have a clear link to your company’s strategy, on top of those that give your key stakeholders the information they want.
Certa’s ESG toolkit can also help you decide which framework will work best for your requirements. We’ll give you the tools to capture all the vital benchmarking data you need for measuring your scope 1, scope 2, and scope 3 emissions.
When considering ESG risks, focus on those that are most likely to have a material impact on your company's ongoing operational performance.
For example, environmental risks like climate change, excessive scope 3 GHG emissions, and water shortages could have a significant impact on your bottom line. Social risks, such as labor disputes and human rights violations, can also impact your reputation. And, finally, governance risks such as corruption, money laundering, and mismanagement can lead to financial losses and damaged credibility.