2021 will be the year topics related to Environmental, Social, and Governance (ESG) risks finally command the attention in U.S. board rooms they have received elsewhere across the globe. Boards will also be focused on the question of how to best measure progress toward organizational ESG goals which include environmental concerns, diversity, social responsibility, resource sustainability, and appropriate governance.
It is difficult for any organization to know whether it is managing ESG risks effectively without a set of widely accepted ESG metrics. Broadly accepted ESG metrics have been lacking. The U.S. Labor Department’s Employee Benefits Security Administration (EBSA) concluded in recent (late October) introductory language to rules limiting investment advisors’ ability to incorporate ESG considerations into some retirement portfolios, that “the lack of a precise or generally accepted definition of ‘ESG,’ either collectively or separately as ‘E, S, and G,’ made ESG terminology not appropriate as a regulatory standard.” Others have recognized this issue and are attempting to address it.
Promising ESG metrics suggestions were announced last fall as part of an ongoing World Economic Forum (WEF) effort. Teams assembled by the Big Four accounting firms led the development of the metrics over a twelve month period. As part of the development process, suggestions were vetted with corporations, investors, regulators, standards bodies, academics and others. WEF’s proposed cross-sector metrics, designed to work across all industries, were based on five key criteria:
- consistency with existing frameworks and standards
- materiality to long‑term value creation
- extent of actionability
- universality across industries and business models
- monitoring feasibility of reporting
Two sets of metrics emerged from the WEF examination. First, the effort identified a set of 21 core metrics which primarily focused on activities within an organization’s own boundaries. A second set of 34 expanded metrics are less well-established today but represent an enhanced approach to measure and communicate sustainable value creation.
At roughly the same time, the European Banking Authority (EBA) issued a discussion paper designed to illustrate a comprehensive approach to the assessment of ESG risks in financial service firms.
Comprehensive approach to the assessment of financial services ESG risks (Source: EBA Discussion Paper 30 October 2020)
The EBA proposed what it called a “non-exhaustive” set of 79 metrics (below) designed to help financial institutions and supervisors identify ESG characterizes. At this point in time the metrics should be considered illustrative and organizations should evaluate them in the context of the materiality of ESG risks to their specific circumstances.
We expect that ESG metrics will mature rapidly in 2021 and that a two-tier set of metrics will eventually emerge – first, a smaller set of ESG metrics that are appropriate to organizations across all sectors; and second, sets of industry-specific ESG metrics.
What you can do:
- Third party risk management practitioners should make sure their organization is paying close attention to emerging ESG Metrics.
- If your organization has not yet identified staff who will focus on ESG issues, encourage that process through your enterprise risk management program structure.
- Once metrics established have been adopted, track progress to achieving ESG organizational goals.
Be sure that your organization offers carefully considered perspectives when regulators are requesting feedback on proposed ESG metrics (both the Financial Stability Board and the European Banking Authority have consultations currently open).
Looking for more risk management metrics? Check out these 14 key metrics for risk management programs.