Conducting an ESG baseline assessment is essential for every company today. “What gets measured gets managed.” This age-old business adage also applies to ESG performance.
Understanding your impact matters
ESG performance and its related measurement is an increasingly important way of holding companies accountable when it comes to sustainability efforts. Companies need to do everything they can to accurately measure the social, environmental, and governance impact of their commercial activities to better understand their current and projected impact and to improve their overall ESG performance – which is increasingly being tied to better access to capital among other favorable outcomes. Robin Nuttal, a leader in McKinsey’s ESG and regulatory practices states, “there have been more than 2,000 academic studies and around 70 percent of them find a positive relationship between ESG scores on the one hand and financial returns on the other, whether measured by equity returns or profitability or valuation multiples.”
With increasing demand for transparency from the companies we do business with, invest in, and live near, ESG performance is no longer optional and even more than a box checking or feel-good exercise, companies with superior ESG performance are benefitting.
Whether focusing on materiality or product lifecycle, an important part of the ESG journey for companies is to make a business case for the investments needed to transition to more sustainable business practices. This means first establishing a baseline for consumption of resources, emissions, and calculating how much can be made in savings via certain treatments – and over what timeline.
How a Baseline Assessment helps you to understand your impact
A baseline assessment is used to gather information on the ESG reality of a company prior to instituting initiatives and programming that aim to address ESG topics. It should be every company’s starting point in the ESG journey wherein they determine where they are currently before envisioning where they wish to go. Most importantly, it creates a basis for comparison, so that initiatives and programs can be analyzed for their effectiveness in reference to this benchmark. Without a proper baseline, a company is unable to monitor progress and improvements over a period of time.
For example, once you’ve decided that logistics are a priority area of ESG focus for your company, how would you know whether your fuel consumption is unsustainable? First, you need to know how much fuel your logistics processes consume. Once you understand the amount consumed, then you can begin to think about the impact it has. You may ask yourself, “How is this contributing to air pollution, marine and avian health, and community and employee wellbeing?” If you find negative consequences that you would like to mitigate, you can begin to build from your baseline and measure your performance over time with the hopes of creating positive improvements.
This is precisely the value of the baseline assessment; only once you begin to understand your company’s direct impacts on various systems can you move on to improving your impact and having a benchmarked point to serve as comparison.
How a Baseline Assessment differs from a Materiality Assessment (and why both are important)
One of the things that a business will need to do when starting out with ESG is to identify what issues are material for their sector, geography, and unique operations. The materiality assessment – which typically comes before the baseline assessment – is a method to identify and prioritize the issues that are most important to an organization and its stakeholders.
The materiality assessment informs which elements should be included in the baseline assessment by providing visibility around the importance of various ESG topics (both positive and negative impacts) to your organization and its stakeholders. The baseline assessment is the next step where you begin to benchmark and measure these effects. Together, these two essential elements of launching your company’s ESG initiatives give power to your ESG decision making.
Roadblocks in Baseline Assessments
While conducting a baseline assessment is an invaluable part of the early ESG journey, it’s not failsafe and the industry is still nascent in terms of robust ESG measurement tools. Harvard Business Review even hints that ESG measurement might be missing something in the bigger picture of what ESG aims to achieve.
Companies may find the specific data they want to measure does not exist or is not as reliable as expected, or even just a painstaking process of extracting data from different sources, perhaps even from different locations around the globe or supplier tiers or business partners, then transforming that data into a usable and trusted resource, and loading it into systems for business users to access it to solve their business problems.
Typically a straightforward ETL business process, for ESG data it can be complex as the importance of ESG issues varies by industry and sector, from company to company, or even country to country. At Good.Lab, for example, we may prioritize Diversity Equity & Inclusion as a company operating in the crux of consulting and technology, two industries poised for nurturing a more agile and diverse workforce, but unlike other similar businesses we do not need to baseline things like waste or water, because we do not have physical office locations.
It can be challenging to understand what your company should be measuring and to ensure that the metrics chosen in fact matter, however, pairing a baseline assessment with a materiality assessment can facilitate focus in these processes and accelerate your journey towards ESG measurement and improvement.
Tips for Conducting your Baseline Assessment
A baseline assessment is essentially bridge between planning and action. When properly conducted, it can drive improvement, shape behaviors, and maximize your ESG efforts. Good assessment means responsive and iterative actions that drive real impact by helping your company to make decisions about what the best next steps might be.
Align Your Baseline Assessment With Your Fiscal Year
Now that you’re convinced that a baseline assessment is an essential part of the beginning of the ESG journey, a key consideration is to align it with your fiscal year. This allows for it to occur at the same point in time as other reporting across your organization and can make it easier to incorporate ESG initiatives into programming and budgeting. It also facilitates organizations to map performance for both financial and non-financial metrics across the same timeframe.
Develop An ESG Committee Of Subject Matter Experts
A second tip is to develop an ESG committee of subject matter experts. ESG topics touch on so many aspects of a business, and not every company has a dedicated sustainability team, therefore it can help to identify a team of people that will help gather the necessary information to advance these initiatives for your company.
Involve Leadership Early On In Your ESG Initiatives
Ensure leadership is involved in your ESG efforts. Business leadership should either play a role in the baselining activities or actively communicate to the rest of the company why you’re engaging in these initiatives. Again, because these topics are difficult and not always easily measured it may be a first instinct to not take it seriously, but a top-down emphasis on the importance of ESG will reaffirm that accurate measurement is integral to the evaluation of the company’s overall performance.
I’ve calculated our baseline, what’s next?
The output you get from your baseline assessment is exactly that – a baseline! The starting point for your ESG journey, the moment that you will refer to when comparing your progress and understanding impact improvements over time.
You’ll see many companies reporting on ESG improvements from the first time they benchmarked – for most companies it is within the past ten years even if they’ve been operating for decades. This is likely due to the recent explosion of ESG among highly visible industry leaders and mounting pressures to measure and report on ESG performance.
With your baseline completed, third parties (and our own data team here at Good.Lab) can help you create dynamic systems to track, store and analyze your ESG data for measurement, improvement, and internal and external reporting. You might also be interested in our next article, where we’ll be discussing setting measurable and achievable ESG goals for your company and why without a baseline assessment, performance setting can often lead to disadvantageous situations.
I need some help calculating our baseline, what’s next?
Today, ESG measurement and reporting are no longer just for the Fortune500 set, and every company should be looking to first conduct a baseline assessment.
For companies early on in their ESG journey, Good.Lab’s ESG Calculator can help you to prioritize issues, assess progress, and uncover opportunities within your operations. Our network of experienced ESG and sustainability consultants can guide you through these activities and help you to conduct a materiality or baseline assessment.