ESG Metrics and the Balanced Scorecard: A New Paradigm for Performance Assessment

The rise of environmental, social, and governance (ESG) concerns have shifted the traditional paradigm of business performance measurement. While financial metrics have historically dominated the assessment of a company's success, the integration of ESG considerations has led to the need for a more comprehensive and balanced approach. The Balanced Scorecard, a strategic management tool introduced in the 1990s, has become increasingly relevant in this context as it allows companies to align their ESG goals with their overall strategy and track progress toward their objectives. In this article, we will explore the implications of using the Balanced Scorecard in the context of ESG and how it can help companies navigate the changing paradigm of business performance measurement.

The balanced scorecard (BSC) is a strategic management tool that provides a framework for measuring and managing performance across a range of perspectives, such as financial, customer, internal business processes, and learning and growth. In the context of ESG (environmental, social, and governance) performance, the BSC can be adapted to include specific metrics and indicators that reflect a company's sustainability performance and stakeholder engagement.

Here is an example of how a balanced scorecard might look like in the ESG context:

Environmental Perspective:

• Carbon emissions (tons CO2e): This metric measures the amount of greenhouse gases (GHG) emitted by a company's operations or products, which contribute to climate change. For example, a company might track emissions from its manufacturing processes, transportation, and energy consumption. One example of a company that has set ambitious GHG reduction targets is Walmart, which aims to reach zero emissions by 2040.
• Energy consumption (MWh): This metric measures the amount of energy used by a company's operations, which can contribute to GHG emissions and also impact energy costs. For example, a company might track energy use in its buildings, equipment, and transportation. One example of a company that has made significant progress in reducing energy consumption is Google, which has achieved carbon neutrality since 2007 and aims to run on 100% renewable energy by 2030.
• Water use (m3): This metric measures the amount of water used by a company's operations, which can impact water scarcity and quality. For example, a company might track water use in its manufacturing processes, irrigation, and cooling systems. One example of a company that has set ambitious water conservation goals is Nestle, which aims to achieve water neutrality by 2025.
• Waste generation (tons): This metric measures the amount of waste generated by a company's operations, which can impact resource depletion and pollution. For example, a company might track waste generation from its manufacturing processes, packaging, and food waste. One example of a company that has made progress in reducing waste is Unilever, which has achieved zero non-hazardous waste to landfill across its manufacturing sites since 2017.
• Biodiversity impact (e.g. hectares of protected land): This metric measures a company's impact on biodiversity, such as through land use or pollution. For example, a company might track the amount of land it protects or restores, or the number of species it impacts. One example of a company that has made significant investments in biodiversity conservation is Danone, which has committed to regenerating 50% of its ecosystems by 2030.

Social Perspective:

• Employee turnover rate (%): This metric measures the rate at which employees leave a company, which can impact productivity and employee satisfaction. For example, a company might track turnover rates by job function or demographic group. One example of a company that has made progress in reducing turnover is Patagonia, which has a voluntary turnover rate of only 4%.
• Diversity and inclusion metrics (e.g. percentage of female, LGBTQ+, and minority employees): These metrics measure the diversity of a company's workforce and the inclusiveness of its culture, which can impact innovation and stakeholder trust. For example, a company might track the percentage of women or minority employees, or the number of employee resource groups focused on diversity and inclusion. One example of a company that has made progress in promoting diversity and inclusion is Salesforce, which has achieved pay equity across gender and race and has increased its percentage of women in leadership roles.
• Community engagement (e.g. donations to local organizations, volunteer hours): These metrics measure a company's contributions to the communities where it operates, which can impact its social license to operate and reputation. For example, a company might track donations to local nonprofits, employee volunteer hours, or investments in community development programs. One example of a company that has made significant investments in community engagement is Microsoft, which has committed to investing $1.5 billion in affordable housing in the Seattle area.
• Health and safety metrics (e.g. lost time injury frequency rate): These metrics measure a company's performance in promoting the health and safety of its employees

Governance Perspective:

• Board diversity (e.g. percentage of female, minority, and independent directors): This metric measures the diversity of a company's board of directors, which can impact decision-making and stakeholder trust. For example, a company might track the percentage of women or minority directors or the number of independent directors on the board. One example of a company that has made progress in promoting board diversity is Bank of America, which has a board that is 50% diverse.
• Ethics and compliance (e.g. number of ethical violations, training hours): These metrics measure a company's performance in promoting ethical behavior and compliance with laws and regulations, which can impact reputation and legal risk. For example, a company might track the number of ethical violations reported or the number of training hours completed by employees on topics such as anti-bribery and corruption. One example of a company that has made significant investments in ethics and compliance is Siemens, which has implemented a comprehensive compliance program since a major corruption scandal in 2006.
• Political spending transparency (e.g. disclosure of lobbying expenditures): This metric measures a company's transparency in disclosing its political spending, which can impact stakeholder trust and influence policy decisions. For example, a company might disclose its lobbying expenditures, donations to political candidates or parties, and membership in trade associations. One example of a company that has made progress in political spending transparency is Microsoft, which has committed to disclosing its political spending and banning donations to candidates who deny the reality of climate change.

Financial Perspective:

• Return on investment (ROI): This metric measures the financial return generated by a company's investments, which can impact shareholder value and sustainability performance. For example, a company might track ROI for sustainability initiatives such as renewable energy projects or supply chain improvements. One example of a company that has achieved significant ROI through sustainability investments is Unilever, which has reported a 70% higher ROI on its sustainable living brands compared to other brands in its portfolio.
• Cost savings from sustainability initiatives: This metric measures the financial savings generated by a company's sustainability initiatives, which can impact profitability and resource efficiency. For example, a company might track cost savings from energy efficiency improvements, waste reduction programs, or sustainable sourcing. One example of a company that has achieved significant cost savings through sustainability initiatives is Walmart, which has saved $1 billion annually through energy efficiency measures and has committed to sourcing 20 key commodities sustainably by 2025.
• Green bonds and sustainable finance: These metrics measure a company's ability to raise capital for sustainability initiatives and their impact on the broader financial system. For example, a company might issue green bonds to fund renewable energy projects or participate in sustainability-linked loans that tie interest rates to sustainability performance. One example of a company that has made significant investments in sustainable finance is Apple, which issued a $2.2 billion green bond in 2019 and aims to become carbon neutral across its supply chain by 2030.

Potential guidance points for companies looking to adopt ESG metrics in their Balanced Scorecard:

• Determine your ESG priorities: Before incorporating ESG metrics into your Balanced Scorecard, it's important to identify the most relevant issues for your business and stakeholders. Consider conducting a materiality assessment to identify the ESG topics that are most important to your company and its stakeholders.
• Align ESG goals with business strategy: ESG goals should be integrated into your overall business strategy to ensure that they are aligned with your company's mission, vision, and values. This can help to increase stakeholder engagement and improve overall performance. Make sure that your ESG goals are specific, measurable, and achievable, and that they support your company's long-term sustainability objectives.
• Establish a framework for data collection and reporting: In order to track progress towards your ESG goals, it's important to establish a framework for collecting and reporting ESG data. This may involve implementing new data management systems, processes, and tools. Make sure that you have a clear understanding of the data you need to collect, how you will collect it, and how you will analyze and report on it.
• Engage stakeholders: ESG metrics are not only important for internal decision-making and performance tracking but also for communicating your company's sustainability performance to stakeholders. Consider engaging with stakeholders, such as investors, customers, and employees, to gather feedback on your ESG goals and metrics, and to communicate progress and challenges.
• Continuously monitor and improve: ESG metrics are not static and may need to be adjusted over time as your business and external factors change. It's important to continuously monitor your ESG performance, identify areas for improvement, and make necessary changes to your goals and metrics. Use the insights from your ESG data to inform your decision-making and drive continuous improvement in your sustainability performance.

By adopting these steps, companies can effectively incorporate ESG metrics into their Balanced Scorecard and drive sustainable long-term value creation.

There are many resources available to companies looking to implement ESG metrics in their Balanced Scorecard. Here are a few potential references to consider:

• Sustainability Accounting Standards Board (SASB): SASB provides industry-specific standards for companies to use in their sustainability reporting, including guidance on ESG metrics. Companies can use SASB's standards to identify the most relevant ESG topics for their industry and develop metrics that are aligned with their business strategy.
• Global Reporting Initiative (GRI): GRI is a widely recognized framework for sustainability reporting that includes guidance on ESG metrics. Companies can use GRI's framework to develop a comprehensive sustainability report that includes ESG metrics and other relevant information.
• Task Force on Climate-related Financial Disclosures (TCFD): The TCFD provides guidance on how companies can disclose climate-related risks and opportunities in their financial reporting. This can be useful for companies looking to integrate climate-related ESG metrics into their Balanced Scorecard.
• United Nations Sustainable Development Goals (SDGs): The SDGs provide a framework for companies to align their sustainability goals with global development priorities. Companies can use the SDGs as a reference for developing ESG metrics that support their sustainability objectives.
• Industry associations and peer groups: Many industry associations and peer groups have developed ESG metrics and reporting frameworks that are specific to their industry. Companies can use these resources to identify relevant ESG topics and develop metrics that are aligned with their industry standards.

In summary, BSC needs to be re-envisioned in the ESG context. To adopt ESG metrics in their Balanced Scorecard, companies should determine their ESG priorities, align their ESG goals with business strategy, establish a framework for data collection and reporting, engage stakeholders, and continuously monitor and improve.

By effectively incorporating ESG metrics into their Balanced Scorecard, companies can drive sustainable long-term value creation.

What are your opinions on these? Do you see these getting incorporated any differently in your industries and domains? Please share your thoughts, suggestions, and perspectives!