The Climate Of Business #139: Are corporate ESG scores dead? The shift toward impact-first metrics

Climate Change Reality

• A recent United Nations report indicates that current global efforts are inadequate, with emissions projected to rise by 1.3% to 57 billion tonnes of CO? in 2023. (The Times )
• Nearly 380,000 people displaced by South Sudan floods, UN says (Al Jazeera )
• Brazil’s government reports a significant decrease in Amazon deforestation rates, reaching the lowest levels in nearly a decade (Business Green )
• Pacific Island nations are grappling with rising sea levels, threatening their existence and prompting calls for immediate global climate action. (NASA Science )
• Intense monsoon rains have caused devastating floods in South Asia, displacing millions and causing significant economic losses. (Al Jazeera )

• The western United States continues to battle extensive wildfires, exacerbated by prolonged drought conditions and high temperatures. (CNN )
• Marine biologists report widespread coral bleaching in the Great Barrier Reef, attributed to rising ocean temperatures. (NASA Science )
• Satellite data indicates that Arctic sea ice extent has reached a record low, raising concerns about the accelerating impacts of climate change. (NASA Climate )
• The World Wildlife Fund reports a 73% decline in global wildlife populations over the past 50 years. (The Wall Street Journal )
• Snow caps Japan’s Mount Fuji to end record lapse (Al Jazeera )

Business Climate Reality

• Despite political pressures, U.S. companies are increasing transparency in environmental and social reporting, with 85% disclosing greenhouse gas emissions. (Reuters )
• The European Union has proposed delaying a law aimed at reducing deforestation, causing uncertainty among commodity producers and importers. (The Wall Street Journal )
• Facing backlash, BlackRock is pivoting its focus from climate issues to retirement solutions. (Financial Times )
• Australia has enacted legislation requiring companies to disclose climate-related financial risks starting January 2025, aligning with global standards. (The Australian )

• Surveys show that climate change anxiety is affecting young people’s career and life decisions, with many seeking employers committed to sustainability. (The Wall Street Journal )
• PEOPLE magazine has published its 2024 list of companies demonstrating significant commitment to community and environmental care. (People )
• Analysts discuss the implications of recent political shifts on corporate sustainability strategies, urging businesses to maintain climate commitments. (Business Green )
• Builders face ban on gas boilers in most new homes in England (Financial Times )
• A 1 megawatt (MW) data centre can use up to 25.5m litres of water annually just for cooling – equivalent to the daily water consumption of ~ 300,000 people (World Economic Forum )

Reality Check?

ESG is an acronym that stands for Environmental, Social, and Governance. It is a framework used to measure a business's non-financial performance in environmental, social and governance categories. The framework has gained prominence as companies and investors alike seek to incorporate socially responsible management practices, aiming to predict both financial performance and risks, alongside conventional financial metrics. ESG’s three pillars guide businesses in evaluating their effects on the environment and their responsibility to stakeholders.

While ESG has been pivotal in pushing companies towards more sustainable practices, experts argue that ESG sometimes falls short in terms of delivering tangible climate results. Traditional ESG ratings, which are often based on compliance and broad risk assessment metrics, do not always reflect real environmental impacts or improvements. For instance, companies with high ESG scores may not necessarily be aligned with critical climate goals like reducing greenhouse gas emissions or decarbonising their operations. The metrics lack a direct emphasis on measurable climate outcomes, such as absolute emission reductions or contributions toward net-zero targets.

Why do ESG Scores fall short in measuring climate impact?

1. Generalised risk assessments vs. targeted impact: ESG scores are primarily designed to assess broad categories, with an emphasis on risk mitigation rather than concrete impact. Environmental criteria in ESG focus on general practices around resource management and pollution control but often lack specific indicators for direct GHG reductions. This gap is particularly evident when assessing Scope 3 emissions, which constitute the majority of emissions for many sectors yet are not adequately covered by traditional ESG metrics.
2. Complexity and lack of uniform standards: Unlike impact metrics that focus on direct emissions data (e.g., tonnes of CO?), ESG ratings are derived from a combination of quantitative and qualitative data sources, resulting in varying methodologies that make comparisons difficult. This variability leads to inconsistent reporting, creating a challenge for stakeholders who seek reliable information on a company’s actual climate performance.
3. Inadequate attention to Scope 3 emissions: Traditional ESG frameworks often overlook Scope 3 emissions, which cover indirect emissions throughout a company’s value chain. Research has shown that these emissions can constitute up to 90% of a company’s total emissions footprint (e.g. large companies like Kraft Foods). A focus on impact-first metrics, by contrast, encourages companies to calculate their full emissions profile, encompassing Scopes 1, 2, and 3, which are essential for understanding true climate impacts.

In response to these limitations, there is a growing push towards impact-first metrics that prioritise measurable climate impacts over traditional ESG scores. These metrics focus on quantifiable outcomes like reductions in GHG emissions, resource efficiency, and net-zero alignment, often over a product’s entire life cycle. Furthermore, a focus on impact-first metrics enables businesses to set meaningful reduction targets that are transparent and aligned with international climate goals. These metrics provide a clearer picture of how a company’s operations impact the environment in tangible ways. This shift is a response to the growing demand for corporate transparency and accountability on climate impacts. For example, standards like the GHG Protocol allows companies to identify and report on emissions from their entire value chain.

Guidelines for shifting towards impact-first metrics

Companies seeking to improve their ESG reporting should consider integrating impact-first metrics into their strategies. This shift not only provides a more accurate reflection of a company’s climate performance but also enables businesses to align with evolving stakeholder expectations.?

Key steps include:

1. Prioritising Scope 3 emission measurement: By expanding their focus to include Scope 3 emissions, companies can provide a holistic view of their climate impacts and address emissions hotspots throughout the value chain. Using GHG accounting protocols, companies can identify significant reduction opportunities and set more targeted climate goals.
2. Setting Science-based Targets (SBTs): Impact-first metrics enable companies to align with science-based targets, which are often used to validate corporate commitments towards net-zero. SBTs provide a quantifiable pathway for reducing emissions in line with climate science, which can help improve transparency and accountability.
3. Adopting sector-specific metrics and protocols: The GHG Protocol’s Corporate Standard provides tailored guidelines for different industries, offering a more specific framework that ESG scores alone do not. This approach helps ensure that businesses use relevant metrics that account for industry-specific environmental impacts.

As investors, consumers, and regulators place increasing emphasis on corporate transparency, the shortcomings of ESG scores are becoming more apparent. While ESG frameworks have laid a foundation for responsible business practices, the climate crisis calls for metrics that directly measure and drive real-world impacts. Impact-first metrics provide this clarity, enabling companies to move beyond broad ESG assessments and towards specific, actionable goals that align with global climate targets. By prioritising measurable outcomes, companies can build stronger, more sustainable futures that not only comply with emerging standards but also foster genuine environmental stewardship.

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