Why Analyzing ESG Metrics Is So Complicated

ESG Metrics

Want to analyze a public company’s financial condition? It takes about a minute to download audited financial statements that go back a number of years and use standard categories—assets, liabilities, equity, revenues, and expenses—with definitions that are reasonably well-understood (unless you get into the nuances of things like revenue recognition or accounting for property, plant and equipment, which can be baffling). You can use these financial statements to compute various metrics and compare companies to their industry peers. 

This standardized reporting allows us to know, for example, that Company A’s debt-to-equity ratio is higher than its industry average, or that there are big differences in inventory turnover across industries, and so on. Having the same information for the companies in a given industry allows us to see which ones are doing well and which are lagging behind. If you don’t have easy access to that information, it is extremely difficult to have an informed view of one company, or prepare a peer group comparison. 

The need for consistent data is one of the big reasons behind the push to establish ESG-related disclosure and reporting standards comparable to the financial disclosures required in annual reports. Requiring companies to report under standards such as those established by the IFRS’s International Sustainability Standards Board, or adhere to the EU Corporate Sustainability Reporting Directive, is not about keeping corporate sustainability teams busy – it’s about information that allows investors, lenders and suppliers to assess risks. 

ESG metrics are industry-sensitive

Just as certain financial metrics are more relevant to some industries than others (for example, service businesses have no inventory, so inventory turnover doesn’t matter for them) the relevance of certain ESG metrics and sustainability issues varies by industry. Sometimes this is obvious – for example, water and chemical use are big issues in the apparel industry, but not for online retail. Sometimes it isn’t so obvious – by now, many people know the difference between Scope 1, 2, and 3 emissions but may not realize that for oil & gas producers, most emissions are Scope 3, which very few companies report. 

Deciding which ESG issues are relevant is still a judgment call. Whose judgment? Always consider the source. A Google search on “key sustainability metrics” produces the following list, near the top of the search results (just below the Sponsored Links). According to this source, Sustainability KPIs include:

  • CO2 emissions reduction in kt.
  • Energy consumption in kWh.
  • Water usage in metric tons.
  • Waste reduction in cubic meters.
  • Plastic reduction in metric tons.
  • Efficiency in material input per unit of service
  • Noise pollution in decibels.
  • Compliance with chemical safety requirements

At first glance, this may look reasonable (although “noise pollution in decibels” is not one that we often see). But look again—there is nothing on this list about impacts on biodiversity or agricultural practices, or even the extent to which noxious chemicals are used (just “compliance with safety standards”) and nothing that would fall under the “S” or “G” pillars of ESG.

Click on a link and you will discover that the list comes from a company that specializes in “procurement analytics” – there’s nothing wrong with that, but the list is not appropriate for many industries (as an aside, we note that supply chain issues such as employee safety and forced labor are not on this list, which gets back to the missing “S” and “G” metrics).

The OECD published a list of 20 sustainability-related indicators it says are key for manufacturers to report; three related to Inputs, eight to Operations, and seven to Products:

InputsNon-renewable materials intensity; Restricted substances intensity; Recycled/reused content.
OperationsWater intensity; Energy intensity; Renewable proportion of energy; Greenhouse gas intensity; Residuals intensity; Air releases intensity; Water releases intensity; Proportion of natural land
ProductsRecycled/reused content; Recyclability; Renewable materials content; Non-renewable materials intensity; Restricted substances content; Energy consumption intensity; Greenhouse gas emissions intensity

This Inputs/Operations/Products breakdown makes sense for manufacturing, but again, is not necessarily relevant for other industries. 


The Sustainable Accounting Standards Board (SASB is now part of the IFRS/ISSB organization) recognizes this reality in its Materiality Map. Here is a partial view of what the SASB considers to be material across just six of 77 industries:

DimensionIssue CategoryHealth Care DeliveryNon-Alcoholic BeveragesElectric UtilitiesAdvertising & MarketingAuto PartsMetals & Mining
EnvironmentGHG Emissions
Air Quality
Energy Management
Water & Wastewater Mgmt
Waste & Hazardous Materials Management
Ecological Impacts
Social CapitalHuman Rights & Community Relations
Customer Privacy
Data Security
Access & Affordability
Product Quality & Safety
Customer Welfare
Selling Practices & Product Labeling
Human CapitalLabor Practices
Employee Health & Safety
Employee Engagement, Diversity & Inclusion

Source: SASB.org, Materiality Finder (https://www.sasb.org/standards/materiality-finder/?lang=en-us)

Clearly, the SASB knows that a given ESG issue may or may not be material, depending on the industry. But, umm…hmm… this says that Selling Practices & Product Labeling are not material for Non-Alcoholic Beverages, and Employee Engagement, Diversity & Inclusion is not material for Health Care Delivery. What if an analyst disagrees? Like we said, this is complicated.

Standardized disclosure requirements would make it much easier for investors, analysts, and other consumers of ESG data to focus on what they believe is important for a given industry. 

Single or double materiality – who chooses?

Every company has to decide which risks to disclose in its financial statements, and it makes sense to impose “materiality” criteria in making those decisions. However, in the ESG arena the issue of materiality can be tricky. Generally known as the single- or double-materiality issue, it gets at the question of whether an ESG factor poses a risk to a company’s financial health, or whether the company is a significant contributor to the risk an ESG factor poses to others.

An obvious example: greenhouse gas emissions may not materially affect an electric utility’s ability to generate power, but the emissions the utility generates are certainly material to GHG emissions overall. Standardized, mandatory disclosures would give consumers of ESG greater control in deciding whether to apply single- or double-materiality in an analysis. 

Timeliness is material

Let’s go back to the ease with which we can obtain audited, standardized financial statements. What if you discovered that the latest statement available for Company A was published in June of 2022, Company B’s most recent statement was issued in early 2021, and Company C’s was from the third quarter of 2020. Oh, and a number of items are missing from each company’s financials. It would be almost meaningless to try to compare the three companies based on this information; in fact, you would probably think there was a glitch in the download process.

This situation is common when analyzing ESG data. The lack of timeliness is frustrating when trying to determine if one company is better than its industry peers, or is making greater strides than those peers on a certain metric – maybe it is, maybe it isn’t. It’s hard to tell when the latest reported ESG data varies wildly. It certainly means “best-in-class” and “best-in-progress” analyses are not just a matter of sorting from highest to lowest. 

In sum, analyzing ESG metrics is not easy, but it is valuable for many reasons (we list 25 of them here). Mandatory, standardized disclosures would help but will take a while. Contact us to learn how OWL ESG’s comprehensive, accurate, transparent, and timely data can make your job easier now.