How to get started with ESG reporting, metrics and measurement
In today's episode, you'll learn about ESG reporting, metrics and measurement techniques. We chat with ESG expert Dave Stangis and explore how to get started, what are the ESG indicators and ratings, as well as how often to review your ESG programs. We also discuss if and why ESG indicators correlate to higher financial returns.
This is part 2 of our discussion on ESG. Watch, listen or read part 1:
What is ESG and why is it important? Lessons learned and best practices with Dave Stangis
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What we discussed:
So today we've got two great guests. My first guest, who is my co-host, she is Erica [00:00:30] Graham Jordan. She's the Regional Vice President here at Benevity. And our special guest today, his name is Dave Stangis, who is the Chief Sustainability Officer with Apollo. And this is part two of our discussion on, I guess, the space of social impact.
Erica Graham Jordan:
Awesome. We're really excited to jump in and particularly start talking about measurement.
This is a question that comes up all the time.
So, people often are not sure where to start, right? Maybe they're new to sustainability. When they think about ESG [00:01:00] overall, they're oftentimes looking to say, "Where do I go?
How do I even get this going?" The part A of the question is, what's the best-in-class way to start tracking, measuring, and refining some of your ESG programs?
What's the best in class way to start tracking, measuring and refining ESG programs?
Dave Stangis:
Yeah, measurement is critical and it's really the place where everybody should start, I think. In every role I've had, it's one of the first things I dig into.
- What do we measure as a company? What do I know?
- What can I glean from that?
- What insights can I get?
- Where are there gaps?
[00:01:30] Because the best companies in the world have gaps in terms of measuring these kinds of indicators, ESG, non-financial-related indicators.
Even if they measure some of them, maybe they measure energy because they're high energy users or they're paying energy bills, there's gaps somewhere else, water or waste or supplier or consultant footprints, things like that.
The social [00:02:00] impact, the human capital piece of it is even harder.
There's always some measures in HR. There may be some measures in the community group around volunteerism, donations, but I would say job one, it's almost kind of job one, two, and three as you're doing parallel work when you start into a role, is really understanding what you have, what are the gaps?
You really can't plan, you can't make good decisions without good data.
First step: Gathering data and understanding your gaps
Getting [00:02:30] the data that you have, understanding where the gaps are, and then starting to really categorize it.
I think that the sophistication of the requests that we're getting for data and transparency are growing every day, every year.
Competition in this space, people are competing on transparency now.
I do think it gets, on the environmental side, I try to tell people, "Try to start with your core, in the wall energy, water, and waste.
You can always expand [00:03:00] from there.
You can then categorize it." On the people side. It's sit down with the HR department or the human capital department, and really understand what they measure, what they don't.
There might be some reluctance to disclose all of the data that they do measure, but figure out what they measure, turn over, investments in employees, training hours, all of these things that help you tell a better story.
Then you can start looking at maybe supplier diversity, spends, what's happening [00:03:30] in our supply chain, but really just try to get a good sense.
Most of these companies have programs that have been around a while so there's things that are in there that you can pull from, but there's always new demands, but getting that baseline is critical.
Erica Graham Jordan:
That's helpful I think. Then when we think about even part B of the question, it's kind of multi-pronged.
I heard some examples of E and S.
Maybe are there other examples on the G side that maybe a foundational company [00:04:00] could start measuring?
Then when we think about how to advance those, what are some advanced areas? If they think about, "What's my long term goal," what are some advanced metrics that I can think about two, three, five years down the road?
How to measure the "Governance" side of ESG? What about advanced metrics
Dave Stangis:
Yeah. I think to touch on the GPS first, before we get to the advanced metrics, a lot of it is just sitting, it doesn't take a long time, but if you stop for a minutes or stop for a day and think about how do we manage all of this work?
What's the organizational structure?
How are decisions made?
How would I communicate to an external [00:04:30] audience the role that the board plays or the CEO plays and where it plays out on the front lines?
Who owns it? Not by name, but by function.
Those are the governance pieces.
What policies do I have in place?
What are the expectations for my sector in terms of external statements on policies?
There may be a gap. Maybe you have an environmental policy, but you don't have a human rights policy or an anti-slavery or a forced labor policy.
Maybe you're in the food business and you don't have an animal welfare [00:05:00] or a sustainable agriculture.
Governance is a lot about the codes of conduct, the expectations set inside the company, but also for our partners. Also then how decisions are made.
It's, again, it's always a challenge to get all this information, especially if you're new or you're coming into a new role, but you can also get a pretty good sense by taking a look at the leaders in your sector and figuring out what they disclose and adapt and modify and build some stretch metrics [00:05:30] for yourself.
I think the advanced metrics in all of these cases are just, like I said, start with your operational footprint like energy, water, waste, people, numbers, diversity, equity and inclusion, gender ratios, cultural ratios.
Then you're start to [00:06:00] think about in the advanced side on the people side what about hiring? What about retention?
- What about gender and diversity ratios within certain cuts of my organization, maybe leadership?
- How many women in management positions?
- What's the turnover look like culturally and racially?
- How many are we hiring?
- How many are we losing?
- What's the cost of replacing talent when they come in?
On the environmental side, it's all the different cuts. It's if you're talking climate, it's scope one, scope two, scope three.
- What's happening in my supply chain?
- On waste it's not just how much waste, it's how much is being recycled?
- Where [00:06:30] is it going? What are the breakouts?
- How much is hazardous?
- How much is solid waste?
- How much can I recycle?
- How much is going to the landfill?
- Where's everything going?
The water's the same way you can segment the sources. Am I pulling from a municipality or a surface supplier, a well?
The advanced metrics are where you really get some of the insights and you really can drive change inside the company, but you can't get the advanced metrics if you don't have the baseline.
On the governance side, it's the same [00:07:00] thing. It's where the next cut of governance is, the how. Here's the structure, but here's how decisions are made.
This kind of content is reviewed at the audit committee of the board of directors.
This kind of content is reviewed in a sustainability committee at the board of directors.
This often, here's the metrics, here's the scorecards we use, here's how we factor this into incentive compensation or recognition.
It's everything that you want to know once you have the baseline data. [00:07:30] If you put yourself in an investor shoes or even in a new employee, what else do I want to know about the company leads you to the next level of me or where can I really either save some money or build the business?
Karl Yeh: Let's dive a little bit more into the metrics.
What are the ESG indicators?
Dave Stangis:
We've touched a lot of them, Karl, but I think that without listing the 160 that you could be in there I think that taking a look at some of frameworks might help. [00:08:00]
If you're thinking about the metrics, taking a look at the existing standards in the global reporting initiative, which really then line by line asks what do you measure?
- What do you report?
- What do you measure?
- What do you report?
All in the social and human capital, all in the environmental, and it really comes down to mapping ... I would say capital flows.
You might like the natural capital or the human capital framework. You might be thinking about it in a different way.
But if you're thinking about all of [00:08:30] the people flows in the business, what could you measure? Hiring, retention, performance, training, investment.
You're investing in this capital, what are you doing? What's the return?
All of the demographic data, both inside your business, but also in your supply chain, maybe even in the way you bring your work to the community.
On the environmental side, if you start with the three basic ones that I mentioned, energy, water, and waste, that you can continue to cut from there.
Packaging, reuse, [00:09:00] partnership, different sources of energy, renewable, geothermal, hydro, electric. It's all taking that down.
The same thing in the governance, it's all about the how.
It's, what policies do we take, literally, physical written, drafted, not only then what do we disclose but then the next cut is, do we train all of our people? Do we train all of our suppliers?
You can really go from 10 metrics to 50 to 200 [00:09:30] pretty quickly.
Then where the world's going is what metrics are you taking out to your value chain?
How are you measuring maybe, perhaps how your customers or consumers are using your products?
- What happens to them at the end of life?
- Also what are you doing with every one of your suppliers?
- Do you have codes of conduct for your suppliers?
- Are the transparency standards for certain materials?
If I have certain inputs, a food company or a heavy materials company around conflict [00:10:00] minerals? Am I tracking all of those things?
Am I tracking the ingredients, where they come from and all of the agricultural inputs or sustainability inputs?
Think of apparel.
How transparent is my supply chain in apparel or luxury goods? Are there human rights issues? Are there labor issues in the supply chain?
There's lots of great sources out there. If you take a look at the B Corp Impact Assessment, it's another great tool [00:10:30] to take a look at metrics, something like the Dow Jones Sustainability Index.
There's outside tools that will help you get even more of a magnifying glass on the kind of metrics you can look at in your company.
Karl Yeh:
How often should a company actually review their indicators, whether to assess how well they've been doing, or maybe they're at a point now they can add, as you mentioned, starting with energy, water, and waste, but maybe it's time [00:11:00] to add new indicators because your company has evolved and become a little bit more sophisticated in their measurement?
How often should you review your ESG indicators?
Dave Stangis:
Sure. The way to think about this is at a minimum, this is an annual process for external stakeholders, investors, people that are looking at the data, rankers and raters.
But where you want to make actionable movement, where you want to use them as strategy, where you want to improve, it could be a completely different cadence.
If I'm building [00:11:30] operational metrics, material flows, energy, water, waste, I want my manufacturing leaders, my supply chain leaders, to be able to decide or make decisions based on perhaps not real time data, but data that's actionable.
I don't want my company to wait a year to get the data that here's how you did last year. All right, now let's make changes?
Maybe you want your operations or your human capital [00:12:00] people to get quarterly snapshots of where you stand or what's happening.
The board might want updates twice a year. You might have to take a cut of a certain set of data for your board of directors to report out.
But at a minimum, it's an annual snapshot of the global performance of the company, especially if you've taken public commitments or goals that you're reporting progress to.
But ideally wherever you want to drive operational change, and this could be either think manufacturing's [00:12:30] easy because you can kind of visualize we're making things, we want to optimize that, we're purchasing products, we're converting them.
But you might also have hiring cycles that maybe you do two major hiring cycles in the year where you're you're picking up talent that graduates new talent or then you're bringing in senior talent in the fall.
These are times where you're going to want to monitor those metrics and learn more often than once a year.
Think about them both from a reporting disclosure perspective, but then an operational decision making [00:13:00] perspective to drive the timelines.
Karl Yeh: Can you share a little bit more about the ESG ratings?
What are the ESG ratings?
Dave Stangis:
Yeah. There's many, many, many now. Almost every week or month a new one comes, out.
I saw in the timeframe that we're having this discussion I've seen the Newsweek Most Responsible Companies come out a few weeks ago.
Just this week, the Just Capital, their top 100 but they also, I think, scored 980 or 990, [00:13:30] close to 1000 companies.
The thing that's interesting is there's so many of them as a company, you have to decide, you have to prioritize and you have to pick ...
You can pick 10, if you want, you can pick 20 or you can pick two, and start figuring out these are important to us for what reason?
Our investors pay attention to them, our employees care about them, our board of directors is interested them or they're really good tools to drive improvement.
I know [00:14:00] when I started this work back at Intel and even took it a little bit to Campbell, I would pick a really good operational strategic ranking and rating and I would pick one that was more focused on disclosure and transparency and they were my two primary drivers.
I might pick the Dow Jones Sustainability Index to drive strategy and operations in my company and I could divvy up that ranking and the rating methodology and I could take it to HR teams and finance teams [00:14:30] and supply chain teams and operational and they could all think about, "All right, what do we want to prove on this year to make us better as a company?"
There's other ratings that are a little bit more taking a look at what you disclose.
The Best Corporate Citizenship list was always a great example of what do you do and where can I find it on a public website?
It was always challenging to figure out, all right, what part of this work are we going to disclose?
Some people spend time focused on the best places to work because they're focused [00:15:00] on culture and talent and so they'll set up a team to focus on those.
I personally have always overweighted investor surveys and rankings because these are things, if my company's going to get ranked and rated or another company's going to sell research on my company to an investor, whether I engage or not, I want to make sure that that information's accurate.
I want to make sure it's up to date.
I want to make sure our best foot is forward in these places. I've often prioritized [00:15:30] those rankings that happen, whether we engage or not.
I think that thinking about internally the strategy and then thinking about the stakeholder demands or interests in the ranking and rating, and then prioritizing from there.
You don't have to prioritize 100 to be good at this. You can pick a few and focus on those and it will have multiplier effect.
Karl Yeh:
So we've been talking about measurement, we've been talking about metrics, but can [00:16:00] you tell us why ESG is important?
Because we're, what? A couple months, well, several months away from the 26th climate meeting and we know what will happen if we don't do anything.
Where should companies actually start? If we don't know where to begin, where should we start?
Where should company's start their ESG journey?
Dave Stangis:
Yeah. I think there's two ways to come at this.
One we talked about is what do you measure today and what information do you wish you had?
I think it's a really [00:16:30] safe place to test your thoughts and to talk to your leadership about after you've done your baseline, here's what we measure.
What do we wish we had?
What other information do we wish we had to make better decisions?
It's a good way to focus on your own internal value proposition as a company, in order to be more agile, just to make better decisions.
But I think the other big driver and probably what more companies are paying attention to today is [00:17:00] the external demands.
Whether you're a public company or a private company, you're being asked about just a range, what's your position on diversity, equity, and inclusion?
How are you making sure your employees feel welcomed and that they can bring their whole self to work?
New talent's asking this when they come to do an interview or other people.
Communities may be asking how are you going to be a good corporate citizen?
Are you going to invest in the community? Are you going to give back?
[00:17:30] But I think that the main external world of investors in terms of capital flows and investment, these people are looking at risk, number one.
Are you doing the right things to manage risk?
Are you watching your resource use, energy, water, or waste?
Do you have any issues in your supply chain that can harm you from a reputation standpoint and hurt my investment? Are there labor issues in your supply chain?
Are there controversies in your supply chain?
Are there [00:18:00] deforestation or biodiversity challenges?
Are there things you're buying in your supply chain, either from a location that's a high risk or a reputation or from a person or an entity that's a problem?
Thinking about it from the risk management side, but then adding on what story do I want to tell?
What do I know my customers are interested in like we talked some of the examples. You can see every sector pivoting a bit.
I have friends in the apparel sector that [00:18:30] are talking about reuse and recycling, organic materials, traceability, knowing where this comes from.
The traceability goes over into food and cosmetics, things that are on me, near me.
These are things people worry about where they come from, how they're made.
Thinking about these things.
What information do I need to make the best decisions and then what are my most important stakeholders interested in? [00:19:00] It assumes you know the answer to that second question, but a lot of companies don't.
They haven't gone through a materiality analysis.
They haven't really mapped out their stakeholders and their influence and how noisy they are and how much leverage they have.
That's an example of another exercise that can help you determine which metrics are most important.
Erica Graham Jordan:
As we think also about just the financial impacts, we see correlations between high ESG scores and better returns. In your [00:19:30] role at Apollo I'm sure you see this and when we think about it, are there certain indicators that are more highly correlated with higher returns?
How should people be thinking about it?
Because I think there's also so much information out there that people don't always know where to focus in terms of, is it one thing, is it many things, is it a category of things when we think about the impact of financials?
Especially as we think some C level execs might not get it yet, but [00:20:00] if they hear the financial impact, then they start getting it as well.
Are there certain ESG indicators correlated with higher financial/business returns?
Dave Stangis:
Yeah. It's a great point, Erica, and I think that the data's got much better in the marketplace about the correlation and sometimes the causation of strong ESG, both metrics and performance, and value, either to the market cap, which is the stock price or to growth and innovation and competitive advantage.
Again, at the risk of kind of restating things, I think that the thinking [00:20:30] about the financial impacts, it's important to focus first on risk.
You need to play defense from a risk management perspective before you can play full offense.
You can do a little bit of both, but you need to make sure you're managing the risks in your supply chain because the value of companies, especially if they're a brand, if I ask you to name a company, you're going to name a company that has a brand that you know or recognize or use.
The intrinsic value or the the market value of these companies is [00:21:00] 60% reputation these days on average and more.
If you sold the company, just sold everything it owned and all its assets, you call that book value, but the value, the stock price or the reputation is much more than that.
It's all reputation.
Could be talent, could be innovation could be products, but a lot of it is just core reputation of the company.
Making sure that you've got a good sense of risk and you're thinking about it. You're looking at enterprise risks, you're thinking [00:21:30] about all of the supply chain, ESG risks, just thinking across the board.
But the value then, then you really start to think about what is most important to the business?
How does my company make money?
Where does money come in? Maybe I have higher margin products, I have maybe hero price, a product that if this went away, the entire company would be in trouble.
Think of almost any company and there's really core products they make. Apple, it might be the iPhone [00:22:00] of certain car manufacturers, one of their two ...
Think of Ford Motor Company, the F-150 pickup. That is their bread and butter.
Every company's got things like that and understanding that business acumen, then you start to focus on the opportunity.
Where do we start to manage the risk, but then let's talk about the value proposition, not only in terms of performance, but of environmental.
This is better for the environment.
We build this, we make this thinking about the suppliers [00:22:30] and what they bring to it. Social
Here's some stories about our supply chain and how we think about it and how we build up the people in our supply chain or how we work with the communities where we build or make this product or deliver this service. It's marketing, it's branding, it's reputation management.
We used to talk about this many years ago about for protecting the brand and building the brand, whether the brand is a company or the brand is a product.
That's how you drive value.
If you think about value creation and actually test yourself. [00:23:00] We're going to launch this great new thing, all of our employees are going to go off and do this thing, and you actually ask yourself hard questions.
How is this going to drive value?
How's it going to increase the value of either the company or the product?
If you can't come up with an answer, you either haven't really thought out the plan, or maybe you're not picking the right strategy.
I think we need to be hard on ourselves because we need to be communicating it to our CFO, our CEO, because they're going to be asked.
"You just invest, [00:23:30] did a hundred million dollars in this cool new thing, Mr. CFO. How is that generating value for me as a long term share owner?"
I think that's a good question to be asking ourselves, because if our finance people, our CFO can't explain it, then we've failed. We need to equip them with that answer.
Karl Yeh:
Dave, we could be talking here for a very long time, but if our audience wants to connect or reach out to you, where's the best place to reach you?
Dave Stangis:
Yeah. The best place is either on Twitter or [00:24:00] in LinkedIn.
I actually try to use those platforms in different ways, putting a little bit more of data pieces and thought pieces and jobs I'm seeing on LinkedIn and then using Twitter for signals that I'm picking up in the marketplace around ESG.
A lot more little short things I'm seeing other companies doing or stories or data on Twitter, but a little bit more about the profession, how are we as a profession [00:24:30] leading and changing, on LinkedIn but those would be the two best places.