The latter half of the 20th century marked a critical turning point for environmental awareness and conservation. In response to growing environmental concerns, companies, governments, and individuals have increasingly recognised the importance of sustainability. This shift has elevated the significance of Environmental, Social, and Governance (ESG) performance metrics for many organisations.
ESG benchmarking is both an internal corporate metric and a comparative measure across industries. Under the right circumstances, it can spur competition among companies to improve their ESG practices and performance and set themselves apart from their competitors.
This article will explore the concept of ESG benchmarking in detail, examining its methodologies, importance, and implications for modern business practices.
What is ESG benchmarking?
ESG benchmarking is the process of measuring and comparing your organisation’s ESG performance against industry peers or specific standards. It is a strategic process, where organisations can systematically evaluate their environmental impact, social practices, and governance standards. By benchmarking, organisations can identify areas where they are excelling and where they need to improve.
While many companies rightfully focus on ESG, pursuing these efforts in isolation can lead to inefficient processes and suboptimal outcomes. It is only by taking industry standards and peer performance into context that organisations can set realistic goals and drive meaningful improvements in their sustainability performance.
Why is ESG benchmarking important?
In addition to evaluating ESG performance, ESG benchmarking also enables organisations to:
- Identify strengths and weaknesses: Knowing where an organisation or department stands compared to your peers can highlight high-performing areas as well as deficiencies.
- Reduce costs: By identifying inefficiencies and areas for improvement, ESG benchmarking can help reduce costs. For example, better environmental practices can lead to lower energy or waste management costs.
- Enhance reputation and revenue: Demonstrating strong ESG performance can attract both investors and customers, improving your company’s reputation and bottom line.
- Reveal emerging trends: ESG benchmarking can reveal emerging sustainability and governance trends that are gaining importance in the industry. By identifying these trends early, companies can adapt their strategies to stay ahead of the curve.
- Improve transparency and accountability: Benchmarking provides insights into an organisation (or department’s) level of accountability. It can help the organisation identify where they might need to be more open in their ESG communications and practices.
- Improve compliance management: Benchmarking provides organisations with a clear picture of what is achievable in their industry. This helps them to set realistic ESG targets and helps to prioritise compliance with relevant laws and industry standards.
- Manage risks: By understanding the ESG risks faced by their peers, organisations can proactively address them in their own business.
- Drive innovation: Benchmarking can spark new ideas and inspire innovative solutions to meet sustainability challenges.
The ESG benchmarking process
Benchmarking ESG performance typically takes two forms, absolute benchmarking and relative benchmarking. Absolute benchmarking, is where a company compares with internal or fixed standards whereas relative benchmarking, sees companies compare their performance with competitors. Both approaches comprise of the following steps:
- Defining the scope
The first step is to identify and prioritise which environmental, social, and governance issues are most critical to the organisation’s success and stakeholder expectations.
- Selecting benchmarking standards or peers
Next the organisation will need to choose the standard or peer that they want to benchmark their performance against.
When performing relative benchmarking, organisations will want to compare themselves to companies in their industry with similar characteristics (size, geographic location, etc.). They will also need to ensure that they can access the necessary sustainability reports required to provide an accurate basis for comparison. If these reports are not readily available, or do not contain all the necessary information, organisations may need to conduct secondary research or engage with the comparison companies directly.
When conducting absolute benchmarking the organisation will compare their performance against fixed standards or goals, such as regulatory requirements, industry best practices, or internally set targets. In this instance industry databases, guidelines, and regulatory frameworks will provide the basis for comparison and so the organisation will need to ensure that they have access to the most up-to-date and relevant versions of these to accurately assess their performance.
- Collecting ESG data
Once the organisation knows what they want to measure, they will need to gather the necessary data. This will typically involve collecting information from internal systems, external databases, and sustainability reports. Where possible organisations should strive to obtain more than just one year’s worth of data. It is typically recommended that organisations obtain at least three years’ worth of coverage to get the most holistic picture. It is also worth noting that this stage of the process can be quite labour-intensive, especially when utilising public data, as it is often presented in a non-standard format.
- Analysing ESG performance
Once the required ESG data has been gathered, the next step is to compare your organisation’s performance against its peers and other standards. There are multiple analysis or benchmark comparisons tools that can help with this process. However, it is worth noting that some metrics, are easier to compare than others. Utilising external ESG experts can simplify and enhance this step.
It is often a good idea to search for patterns, trends, and outliers at this stage, and to keep a log of the previous years’ ESG performance to help keep track of the organisation’s progress over time. This will help shape future ESG strategies, policies and targets and ensure continuous improvement over time.
- Reporting progress
The final step in the ESG benchmarking process is to report on the findings and progress. This involves communicating the results of the benchmarking analysis to key stakeholders, both internally and externally. The report should highlight areas of strength as well opportunities for improvement and outline the steps the organisation plans to take to address any gaps. Regularly reporting on ESG performance helps build transparency and accountability and reinforces the organisation’s commitment to sustainable practices. It also provides a foundation for setting future goals and aligning the organisation’s ESG initiatives with broader strategic objectives.
Benchmarking ESG: challenges and best practices
Effective ESG benchmarking has several key challenges. Finding consistent and reliable ESG data can be difficult as the accuracy and quality of data can vary considerably across departments, organisations and industries. Organisations frequently struggle with data availability, particularly when comparing against peers who may not disclose any negative findings. This is compounded by a lack of standardisation in reporting frameworks and metrics. Furthermore, the evolving nature of ESG means that the criteria and expectations for what constitutes good performance are constantly changing, all of which makes it challenging to draw meaningful comparisons.
To get the most out of benchmarking ESG, it is important to follow several best practices. Firstly, organisations should seek to involve stakeholders early. Obtaining input from employees, investors, customers, and other relevant parties can help identify material ESG issues that can otherwise be ignored. Secondly, use a consistent methodology by applying the same benchmarking approach over time to track progress accurately. Thirdly, leverage technology by utilising ESG data management and analysis tools to help streamline the process. Lastly, communicate results and subsequent action plans with both internal and external stakeholders to build trust, and align efforts with broader organisational goals.
Benchmarking ESG
ESG benchmarking is a powerful technique for assessing your company’s sustainability performance and creating long-term value. By understanding where your company stands in relation to your competitors, you can identify opportunities to improve your ESG practices and enhance your reputation without compromising on revenue.
At Farrelly Mitchell, our sustainability and ESG experts provide strategic support to food and agribusinesses looking to navigate evolving ESG trends and create lasting, sustainable growth. This support extends through our consulting services and covers traceability and transparency, water management, clean energy, food loss and waste, food safety and much more. To find out how our sustainability consultants can help your organisation develop and implement effective ESG strategies please contact our team today.
