ESG Data Explained: A Comprehensive Guide to Metrics, Calculation, and Reporting — Part I

8 min readAug 2, 2023

Introduction to ESG Data
Understanding ESG Classifications
Environmental Data:
— Key Terminology and Classifications
— Overview of Reference Data
— Explanation of the Calculation
— Authorities & Data Providing Mechanism
— Reports
Social Data:
— Key Terminology and Classifications
— Overview of Reference Data
— Explanation of the Calculation
— Authorities & Data Providing Mechanism
— Reports
Governance Data:
— Key Terminology and Classifications
— Overview of Reference Data
— Explanation of the Calculation
— Authorities & Data Providing Mechanism
— Reports
Conclusion

Introduction to ESG Data

ESG data encompasses Environmental, Social, and Governance indicators used by a variety of stakeholders, including investors, consumers, and regulators, to assess a company’s overall impact. The environmental aspect gauges the company’s practices related to ecological preservation and its approach to reducing carbon emissions. The social component looks at how a firm manages relationships with its employees, suppliers, customers, and the communities where it operates. The governance pillar evaluates a firm’s leadership, audit procedures, internal controls, shareholder rights, and transparency.

By using ESG data, stakeholders can better understand a firm’s performance beyond traditional financial metrics. It allows them to assess the firm’s long-term resilience, ethical stance, and dedication toward sustainable development. In an era where accountability and transparency are increasingly valued, ESG data plays a vital role in guiding investment and operational decisions.

Understanding ESG Classifications

The classification of ESG data helps in organizing the wide range of indicators involved. They typically fall under three main categories: Environmental, Social, and Governance. Each of these categories has sub-classifications that target specific areas.

Environmental Classification

The key metrics here evaluate a company’s impact on the environment, providing information about:

Greenhouse Gas Emissions (including Scope 1, 2, and 3 emissions which we’ll explore later)
Waste Management
Water Usage
Energy Efficiency
Biodiversity Impact
Risk and Adaptation to Climate Change

Social Classification

This measures how a company manages relationships with employees, suppliers, customers, and communities. Indicators include:

Labor Standards
Health and Safety
Diversity and Inclusion
Community Relations
Privacy and Data Security
Customer Satisfaction

Governance Classification

This evaluates the internal systems of the company, with attention to:

Board Diversity and Structure
Executive Compensation
Corruption and Bribery
Shareholder Rights
Financial Transparency and Audit Standards

Understanding these classifications is crucial to interpreting ESG data and using it to make informed decisions.

Environmental Data: Key Terminology and Classifications

One of the primary metrics for environmental impact comes from a company’s greenhouse gas (GHG) emissions, which are typically divided into three ‘Scopes’.

Scope 1 emissions

Scope 1 emissions are direct emissions from owned or controlled sources. For instance, this would include emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc., or emissions from chemical reactions that occur during the production process in owned or controlled processes.

Scope 2 emissions

Scope 2 emissions are indirect emissions from the generation of purchased energy. They refer to emissions from the production of electricity, heat, or steam that a company purchases and uses.

Scope 3 emissions

Scope 3 emissions are all other indirect emissions that occur throughout a company’s value chain. This includes activities such as business travel, employee commuting, procurement, waste disposal, and use of sold products and services.

These classifications help companies identify where their emissions are coming from and develop strategies to reduce their carbon footprint. Each ‘Scope’ requires a different approach to managing and reducing emissions effectively.

Environmental Data: Overview of Reference Data

Reference data in the context of environmental metrics serve as the standard basis for calculating a company’s environmental impact. For greenhouse gas (GHG) emissions, this often involves using standard emission factors that convert activities (like burning a gallon of diesel fuel or a megawatt-hour of electricity consumed) into the equivalent amount of carbon dioxide emissions.

For example, the U.S. Environmental Protection Agency (EPA) publishes a comprehensive set of emission factors that companies often use for their calculations. These factors consider not just the carbon content of various fuels, but also the typical combustion efficiency of different types of equipment.

In other environmental areas, reference data can include factors like:

Water Use: Local rainfall data, freshwater availability, or water recycling rates can help calculate a company’s water footprint.
Waste Production: Reference data might include typical waste generation rates for different types of operations or information about the percentage of waste typically recyclable in different waste streams.
Energy Efficiency: Benchmarks might include the typical energy use of different types of equipment or operations.

In all cases, reference data provides the key for translating raw operational data into meaningful ESG metrics.

Environmental Data: Explanation of the Calculation

Scope 1 Emissions Calculation

Scope 1 emissions are direct emissions from sources owned or controlled by the organization. These are typically from the combustion of fuels.

Identify the company data: Quantity of fuel consumed (F) in gallons
Identify the reference data: Emission factor for the specific fuel (Ef1) in kg CO2/gallon. This factor is derived from the carbon content of the fuel and the heat of combustion.

Formula: Scope 1 Emissions = F * Ef1 Substitute values: 10,000 gallons * 10.21 kg CO2/gallon = 102,100 kg CO2

Scope 2 Emissions Calculation

Scope 2 emissions are indirect emissions from the generation of purchased energy, typically electricity.

Identify the company data: Quantity of electricity purchased (E) in MWh
Identify the reference data: Emission factor for the regional electricity mix (Ef2) in metric tons CO2/MWh. This factor is derived from the mix of energy sources used to generate the electricity and their respective emissions.

Formula: Scope 2 Emissions = E * Ef2 Substitute values: 1,000 MWh * 0.5 metric tons CO2/MWh = 500 metric tons CO2

Scope 3 Emissions Calculation

Scope 3 emissions are all other indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream emissions.

Identify the company data: Total miles traveled by air (M)
Identify the reference data: Emission factor for the specific mode of travel (Ef3) in kg CO2/mile. This factor is derived from the fuel efficiency of the transport mode and the emission factor of the fuel used.

Formula: Scope 3 Emissions = M * Ef3 Substitute values: 1,000,000 miles * 0.18 kg CO2/mile = 180,000 kg CO2

While the formula for each Scope remains the same (Activity Data * Emission Factor), the types of activities, the relevant data, and the derived emission factors are distinct for each Scope. This reflects the different sources of emissions and their respective environmental impacts.

Net-zero emissions Calculation

Net-zero emissions are achieved when the quantity of greenhouse gas emissions produced by a company or country is balanced by the amount it removes from the atmosphere or offsets. This doesn’t imply the absence of greenhouse gas emissions; rather, it signifies an equilibrium between emissions and their offset or removal.

Below is a simple hypothetical example that illustrates this concept:

Calculate Total Greenhouse Gas Emissions:

Scope 1 Emissions (direct emissions from owned sources): 500 tons CO2e
Scope 2 Emissions (indirect emissions from the consumption of purchased electricity, steam, heating, and cooling): 300 tons CO2e
Scope 3 Emissions (all other indirect emissions from activities of the organization, such as business travel, employee commuting, etc.): 200 tons CO2e
Total Emissions = Scope 1 + Scope 2 + Scope 3 = 500 + 300 + 200 = 1000 tons CO2e

Calculate Total Emissions Removed or Offset:

Carbon Removal (e.g., through afforestation projects): 300 tons CO2e
Carbon Offset (e.g., through renewable energy credits (RECs) or other mechanisms): 700 tons CO2e
Total Removed/Offset = Carbon Removal + Carbon Offset = 300 + 700 = 1000 tons CO2e

In this scenario, the company has achieved net-zero emissions, as the total emissions (1000 tons CO2e) are equal to the total removed/offset (1000 tons CO2e).

However, it’s crucial to understand that achieving net-zero emissions, in reality, is a more complex process than merely balancing the numbers. It necessitates a strong commitment to minimize emissions as far as possible via operational efficiencies and the adoption of cleaner energy sources, and then to offset or remove the remaining emissions. The integrity and effectiveness of offsetting and removal strategies should be thoroughly verified.

Environmental Data: Authorities & Data Providing Mechanism

The gathering, verification, and dissemination of environmental data are essential aspects of maintaining accurate and reliable ESG metrics. This task is often handled by a variety of authorities and data providers who take on the responsibility of ensuring that the information companies use for their ESG reporting is trustworthy and up-to-date.

Authorities

These typically include government bodies, international organizations, and standard-setting institutions. For example, the U.S. Environmental Protection Agency (EPA) and the United Nations Framework Convention on Climate Change (UNFCCC) are two key authorities that provide data and guidance on GHG emissions. Standard-setting bodies like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) also play a crucial role in defining what data should be collected and how it should be reported.

Data Providers

In addition to these authorities, numerous third-party organizations specialize in collecting and providing ESG data. These can include commercial data providers, research institutions, and non-profit organizations. They gather data from various sources, including direct reporting from companies, government databases, and independent research. They then process this data, ensuring it meets relevant standards and is easy to use.

Data Refresh and API

Authorities and data providers often offer digital platforms and APIs (Application Programming Interfaces) that allow companies to access and download up-to-date ESG data. These platforms are regularly refreshed with new data as it becomes available — for example, when a company submits its annual environmental report or when a new research study is published.

Environmental Data: Reports

Environmental reports vary in nature and scope, depending on the jurisdiction, industry, and specific stakeholder requirements. They are essential tools for companies to communicate their environmental impacts and actions to reduce them, providing investors, regulators, and the wider public with the information they need to assess a company’s environmental performance and risks.

Here are key environmental reports that are widely used:

Sustainability Reports

These are holistic reports that provide a detailed view of a company’s ESG efforts, including environmental, social, and governance aspects. They often follow guidelines set out by organizations like the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB).

Carbon Disclosure Project (CDP) Reports

CDP is a non-profit that runs a global disclosure system for companies, cities, states, and regions to manage their environmental impacts. Thousands of companies report their GHG emissions and other environmental data to CDP annually.

Task Force on Climate-related Financial Disclosures (TCFD) Reports

The TCFD provides a framework for companies to disclose their financial risks related to climate change. This includes data on a company’s GHG emissions, along with details of how they might affect the company’s financial health.

Greenhouse Gas (GHG) Inventory Reports

These reports provide a detailed account of a company’s GHG emissions, usually covering Scope 1, 2, and 3 emissions, following standards like those provided by the GHG Protocol.

Environmental Impact Assessments (EIAs)

EIAs are often used for specific projects (like building a new factory or starting a new extraction operation) to assess potential environmental effects. They usually include data on how the project will impact things like local biodiversity, water sources, and air quality.

Disclaimer: The views reflected in this article are the author’s views and do not necessarily reflect the views of any past or present employer of the author.