What to measure? Key performance indicators for sustainable business
The business world is paying attention to the environmental, social and governance (ESG) expectations of its stakeholders, including customers, employees, investors, and regulators. This requires a holistic and questioning approach to sustainable measurement and evaluation that aligns with company objectives, provides clear direction, and is held accountable through governance arrangements.
What is driving measurement?
The common drivers for sustainability performance measurements are regulatory requirements and reform, material issues (the starting point for any sustainability reporting), exposure to ESG risks, the company’s strategic goals, and stakeholder values, knowledge and aspirations.
Furthermore, the interconnections and systemic aspects of sustainability issues mean there is likely to be overlap. Take climate-related financial disclosures as an example, this can be driven by a desired strategic outcome (e.g., achieve net zero emissions), regulation (e.g., mandatory disclosures), and level of risk exposure (e.g., physical risks of climate change, and transition risks from policy, regulatory and technological change).
Performance measurement drivers for sustainable business.
Deciding what to measure
Settling on a list of KPIs/metrics is necessary to enable consistent measurement over time and demonstrate alignment with strategic goals.
This list will necessarily include those specified in an environmental permit or licence, such as to demonstrate environmental compliance and improvement (i.e., regulatory driver). Similarly, Australian companies that exceed specific greenhouse gas emission and energy consumption thresholds must report their scope 1 and scope 2 emissions under the National Greenhouse Emissions Reporting Act 2007. Other Australian legislation driving mandatory disclosures is the Modern Slavery Act 2018 and upcoming requirements for disclosing climate-related financial risks and opportunities[1].
Material topics are evaluated through multi-stakeholder engagement to understand the issues that impact on the company’s value creation (financial materiality) and the aspects that impact on the economy, environment, and people, including impacts on human rights (impact materiality). The Australian Treasury’s proposed approach to climate-related financial disclosures[2] has a slightly different take where materiality applies – “if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial reports…make on the basis of these reports”.
While materiality provides a relative assessment of the ESG issues most important to stakeholders and the company, risk analysis and evaluation prioritises treatment actions based on the likelihood and consequence of an event (inherent risk), risk controls (inherent risk) and the risk criteria used to guide decision-making. The two should converge, but in practice, risk analysis provides a more granular evaluation by focussing on events and scenarios as opposed to issues.
Sustainability leaders also include KPIs that demonstrate positive environmental or social impact. For larger organisations, this is often demonstrated by alignment with a global framework or program, such as GRI or the SDGs or certification, such as Climate Active or BCorp.
Whatever the drivers are, organisations need to keep their KPIs relevant and decision useful. There is little value in selecting indicators where the data is unavailable, unverifiable, unreliable and/or inconsistent.
The decision process comprising KPI review, stakeholder engagement, potential KPI list and testing against desired outcomes.