ESG KPIs – Defining and implementation in practice

We held a mini-interview with Mr. Bernie Smith, Business Consultant, Made to Measure KPIs, United Kingdom, who will give a lecture on "ESG KPIs – Defining and implementation in practice" at:

 6. FINANCIAL CONFERENCE: ESG - Imperative of future business, 10.04.2024.

1. How does a company identify and prioritise relevant ESG KPIs based on its industry, size, and stakeholder expectations?

ESG is a broad collection of varied outcomes spanning from the environmental (which is a scientific, highly measurable and data-rich topic) to the much more subjective and values-centric areas, such as DEI (Diversity, Equity and Inclusion) which typically have fewer concrete, measurable metrics.

The first step is to identify the relative priority of the eleven common ESG strategic objectives for the organisation. It will not be possible to implement everything at once, so we need to start with the most relevant and urgent.

KPI Trees provide a powerful method for both breaking down our ESG strategic results into potential KPIs and also engaging the organisation in the selection of those KPIs. Here is a sample KPI Tree for Governance and Ethics that demonstrates the approach:

Sample of ESG KPI Tree for Governance and Ethics

https://drive.google.com/file/d/1lb8Q7YMMqKfCyWyGKBERVcAUI4AnOQBK/view?usp=drive_link

Whilst this approach is powerful and hugely effective at building engagement, it does produce too many candidate KPIs, sometimes hundreds. Clearly, the organisation is likely to become overwhelmed if it attempts to measure everything, so we need a structured and repeatable process for thinning that list down. That method is 'Shortlisting'.

Shortlisting involves asking two simple questions of each candidate KPI. The first question is "How important is this KPI to our organisation?". The second question is "How practical is this KPI to collect and measure?". Both of these questions are scored on a scale of 1 to 10 and enable us to quickly triage and prioritise our selection, focusing our team on the highest priority measures, but also providing a 'roadmap' for future development.

Whilst KPI Trees and Shortlisting are critical steps in the ESG KPI selection process, it’s important not to overlook the importance of team engagement and the impact of report design on their use and impact. The Results-Orientated KPI System (ROKS) includes not only the KPI Tree and Shortlisting steps, but also other key steps required for successful implementation.

You can find out more about the ROKS approach here: https://madetomeasurekpis.com/roks-kpi-method-overview/ 

2. How do companies ensure the accuracy and reliability of data used to measure ESG KPIs?

The accuracy and reliability of KPIs relies on two crucial components - robust initial definition and ongoing process auditing.

During our design phase, the KPIs need to be defined in a clear, consistent and logical way, using a standard template. The ROKS KPI Definition Canvas offers the optimal tool for this structured definition process. The canvas guides the KPI design team through a series of questions focusing on vital elements like:

• Precise metric descriptions
• Specific calculation formulas
• Underlying data sources and access protocols
• Explicit inclusions and exclusions
• Baselines benchmarks
• Frequency of measurement
• Dimensionality and segmentation

The canvas enables collaborative input into the KPI definitions from relevant stakeholders including data specialists, business analysts, department heads and end dashboard users. This cross-functional alignment ensures the metrics ultimately designed meet diverse needs for measurement and analysis.

Defining each KPI metric using the ROKS canvas offers several additional advantages:

• A structured method for initial definition that improves consistency
• The opportunity for collaborative review during the definition process, enhancing accuracy
• An audit tool for the KPI once it has gone live, aiding quality control
• Source material for ‘standard operating procedures’ (SOPs), user guides and other training documents, facilitating adoption
• A document trail for audit and quality purposes that demonstrates diligence

Once the KPI definitions are complete and the metrics go live in reports and dashboards, it remains critically important to regularly audit each step of the production process. Everything from underlying data collection, integration processes and calculation models through to final visual presentation of the metric should be examined for errors or deviations from the specification. Even minor issues identified by end users rather than through audits can undermine confidence and adoption. Instituting robust process controls is key to maintaining accuracy as KPIs are rolled out across the organisation.
 

3. What challenges do organisations typically face when implementing ESG KPIs, and how can these challenges be overcome?

There are a number of common challenges when organisations implement ESG KPIs. Some are common to all KPI types, others are specific to ESG KPIs. When it comes to implementing any KPIs, going live is a pivotal moment that brings its own set of challenges. Here are five common issues often encountered during go-live and ‘business as usual’…

1. Forgetting to Collect or Review Your KPIs

Issue: Organisations may forget to collect or review KPIs, leading to a gap in performance tracking.
Impact: This lapse can result in missed opportunities for improvement and a lack of awareness regarding current performance levels.
Mitigation: Set calendar reminders for KPI review and collection. If boredom or dislike for the data is the cause, reassess your KPIs to ensure they're meaningful and engaging​​.

2. Stagnant Discussions During Reviews

Issue: Repeatedly discussing the same issues in KPI reviews without progress.
Impact: This can lead to frustration and the perception that KPI tracking is unproductive.
Mitigation: Ensure robust problem-solving processes are in place. Follow up on actions and ensure they are practical and achievable​​.

3. Off-Track Meetings

Issue: KPI meetings that deviate from the agenda, leading to unproductive discussions.
Impact: Frustration due to lack of progress and potentially critical issues being overlooked.
Mitigation: Clearly define meeting purposes, ensure effective chairing, and hold participants accountable for their contributions​​.

4. KPI Mistakes

Issue: Errors in KPI data, such as incorrect calculations or data entry errors.
Impact: Trust in the KPI system can quickly erode if inaccuracies are not addressed promptly.
Mitigation: Quickly and transparently address any data inaccuracies. Implement checks and balances to prevent future errors​​.

5. Toxic Targets Culture

Issue: KPIs leading to a negative culture focused on hitting targets at any cost.
Impact: Can drive unethical behaviour, gaming of the system, and demotivation among teams.
Mitigation: Focus on creating a culture that values achieving targets through ethical means and teamwork. Offer non-financial rewards and recognise efforts towards improvement​​.
In addition to the usual KPI implementation challenges, ESG KPIs bring some specific potential issues…

6. Lack of meaningful raw data

Issue: Some potential ESG KPIs can be quite ‘intangible’, particularly around behaviours and attitudes, with a notable absence of readily available raw data. 
Impact: This can lead to frustration and a feeling that ‘ESG KPIs are impossible to measure’.
Mitigation: Careful choice of ESG KPIs during Shortlisting, focussing on ‘Ease of measurement’ during the scoring process, is the first step. If we identify a KPI that we feel is crucial, but not currently measurable, then we should consider ‘proxy KPIs’, these are KPIs that are not directly linked to the outcome of interest but give some indication of its behaviour. A non ESG example would be that a raised resting heart rate is a leading indicator of infection in a person - in this example we aren’t measuring their infection directly but are able to observe that measurable things are linked to the infection.

7. Isolation from other KPIs within the organisation

Issue: ESG KPIs are regarded as something to ‘tick the box’ and for public relations or compliance purposes and are not fully integrated into the every-day management of the organisation.
Impact: ESG KPIs may be rarely reviewed, acted on or valued by the senior management team
Mitigation: Leadership buy-in, aligning ESG KPIs with business strategy, assigning ownership, regular reporting, stakeholder engagement, capacity building, incentivising performance, and continuous improvement are crucial for successfully implementing ESG KPIs in an organisation. These steps ensure ESG integration is prioritised, monitored, and refined to drive long-term success.

8. Lack of middle-management focus

Issue: Management often fails to prioritise KPIs and performance measurement, treating them as mere formalities rather than essential tools for organisational success. This lack of focus stems from inadequate understanding of the strategic importance of KPIs, insufficient resources allocated to performance measurement, and a short-term mindset that prioritises immediate operational concerns over long-term performance monitoring and improvement.
Impact: Without proper management focus, KPIs become ineffective in driving organisational performance. Poorly defined or misaligned KPIs fail to provide meaningful insights, leading to poor decision-making. Inconsistent monitoring and reporting of KPIs result in missed opportunities for improvement and a lack of accountability - the organisation may fail to achieve its strategic objectives and remain competitive in the market.
Mitigation: It is critical that top management must champion the importance of KPIs and performance measurement in both the words they use and their actions. Leadership behaviours often have a far greater impact on their subordinates than the words they use.
 

It's crucial to approach these common go-live problems with a proactive and solution-focused mindset. By recognising and addressing these challenges early, organisations can ensure that their KPI systems are effective, supportive of their strategic goals, and conducive to a positive and productive work culture.

If you want to learn more about the "ESG KPIs – Defining and implementation in practice", join us at: 

6. FINANCIAL CONFERENCE: ESG - Imperative of future business, 10.04.2024.