5 Benefits of a Gold-standard ESG Benchmark

click image to enlarge

In my last blog, I positioned a benchmark that would be used by raters and rankers of companies’ sustainability progress, and by companies themselves. Rather than assessing a company’s environmental, social, and governance (ESG) performance against its past performance, its ESG goals, or against other companies, we would assess how much closer it is to being a truly sustainable business, as defined by a fourth gold-standard ESG benchmark.

Let’s suppose we could define a small set of science-based key performance indicators (KPIs) for that ESG benchmark. Would that be a good thing or a bad thing? Here are five benefits of having a gold-standard benchmark for a truly sustainable business.

1. It addresses the confusion factor

One lament in the business community about sustainability is that it is difficult to understand. It is too complex and has too much confusing terminology. A gold-standard ESG performance benchmark outlines clear, measurable sustainability criteria. It promotes sustainability literacy, since its criteria are expressed in relevant, measurable, science-based terms. The benchmark blows the fog away from the finish line in a race to the top.

2. It creates a sense of urgency

Scientists remind us that we are running out of time to reverse the critical ecosystems trend lines, or to prevent them from spiraling out of control, as is happening with climate destabilization. As companies wake up to the scale of the sustainability challenges they face, they experience a sense of urgency. Executives and employees see how far they need to go, and make capital allocations on high-leverage programs to accelerate progress. The gold-standard ESG performance benchmark is the GPS that ensures we know where we’re going, how much further we need to go, and spurs us on to get there in time.

3. It raises the bar and sparks innovation

A gold-standard ESG performance benchmark describes the desired end state for the business. We can use it as a diagnostic template to do a gap analysis of where the company is now on its sustainability journey. A rigorous benchmark sparks transformational approaches to being a great company, not incremental approaches toward being “less bad.” Leadership literature is replete with stories about how aspirational goals / Big Hairy Audacious Goals (BHAGs) / compelling visions unleash innovative breakthrough thinking. The gold-standard ESG performance benchmark is a BHAG. There is nothing like a “mission impossible” moon-shot to energize and unleash stakeholders’ out-of-the-box thinking to create an exciting transformational path to the desired destination. Stretch goals energize creative thinking, convey importance, and compel action. “Zero waste” stimulates more creative strategies than “reduce waste by 10 percent.”

4. It identifies true leaders and best practices

If we want to find which companies are the most sustainable on the planet, why don’t we just check the ranked list? Because there isn’t one. Or rather, there are too many lists that purport to be that list. The Global Initiative for Sustainability Ratings (GISR) has identified 108 organizations directly or indirectly involved in rating, ranking, and certifying organizations on their ESG attributes. A lack of consistency among companies ranked the highest on various lists suggests diverse assessment criteria. Few companies can afford to invest the time to get onto all the lists. Many of the raters’ methodologies are proprietary so we can’t check their criteria, weightings, or approach, which undermines trust and confuses decision-making. The lack of transparent standards makes it difficult to tell the difference between a ‘good company’ and just good marketing. Leaders in the race toward being a truly sustainable business should be celebrated, not penalized, for being early movers. We need a gold-standard ESG performance benchmark so that we can assess all companies against an agreed upon and transparent set of criteria for a truly sustainable business; agree on the leading companies; and learn from their best practices.

5. It helps identify material ESG issues

There are too many sustainability related surveys and questionnaires. Over 100 sustainability raters administer questionnaires to thousands of companies worldwide. Each rating / ranking organization has its own pet issues, phraseology and metrics, leading to survey fatigue. We need to cut through the clutter. One way to do so is to focus on issues that are material. “Materiality” most frequently refers to performance information that would be necessary for a reasonable investor to make informed investment decisions. These days, investors need to know more than the company’s financial track record and its financial risk and opportunities going forward. ESG factors that are material to other important stakeholders are, by definition, material to company success. Company success is material to investors. So, if ESG performance is material to other important stakeholders like governments / regulators, lenders, communities, customers, and the environment, it is also material to investors.

These are the reasons that a gold-standard ESG performance benchmark for sustainable business would be good thing. That’s why I am working with The Natural Step (TNS) to define its KPIs based on science-based systems conditions for a flourishing human society on our finite planet. We’ve been developing it over the last year, and it will be launched in June 2014. In my next blog, I’ll outline seven reasons that this is a timely effort.

Please feel free to add your comments and questions using the Comment link below. For email subscribers, please click here to visit my site and provide feedback.

Bob