Investors face mounting expectations to prove that their investment portfolios are not just profitable, but also sustainable. Regulators, clients, and other stakeholders increasingly expect portfolio managers to show, backed by credible data, that they are managing climate risks and delivering strong sustainability performance.
The urgency has intensified over the past decade. Once considered a niche topic, ESG (environmental, social, and governance) performance is now embedded in mainstream investment conversations. The rise began in the early 2010s, as initiatives like the UN’s Principles for Responsible Investment (PRI) encouraged investors to integrate ESG considerations into decision-making. By the mid-2010s, frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) began shaping disclosure norms.
Today, a wave of regulation is accelerating the shift. The EU’s Corporate Sustainability Reporting Directive (CSRD) mandates detailed, standardized non-financial reporting from 2025. The Sustainable Finance Disclosure Regulation (SFDR) requires asset managers to be transparent about the sustainability of their products. These rules are converging with global standards from the International Sustainability Standards Board (ISSB), promising greater comparability while raising the bar for compliance.
Investor-led initiatives are adding further pressure. Campaigns like Climate Action 100+ and the Net Zero Asset Managers initiative expect signatories to set measurable targets, disclose progress, and actively engage with portfolio companies. This is where ESG benchmarking becomes essential. Without it, measuring progress against commitments is guesswork.
Why ESG benchmarking matters in investment portfolios
ESG benchmarking provides a measurable view of how a portfolio performs on sustainability criteria compared to peers, indices, or global frameworks. It helps investors:
- Track progress toward net-zero and other ESG targets
- Identify areas where sustainability performance lags
- Understand portfolio exposure to climate-related and social risks
Supporting risk management
Benchmarking highlights where a portfolio is most vulnerable, whether to regulatory non-compliance, reputational harm, or physical climate risks such as flooding or extreme heat. For example, a real estate investment trust might use energy efficiency and climate resilience benchmarks to prioritize retrofits, protecting both asset value and tenant safety.
Unlocking opportunity
ESG benchmarking goes beyond avoiding downside by identifying companies that lead in renewable energy adoption, supply chain transparency, or workforce diversity, potentially positioning them for long-term growth. Private equity firms, for instance, use ESG benchmarking in due diligence to spot operational efficiencies, innovation potential, or market differentiation opportunities.
Backed by performance data
The link between ESG alignment and financial performance is growing stronger. From 2019 to 2023, ESG funds delivered median annual returns of 12.6% compared to 8.6% for traditional funds, according to The Washington Post.
Breaking down ESG benchmarking metrics
A strong ESG benchmarking approach considers all three pillars, environmental, social, and governance, each with their own relevant metrics.
Environmental metrics
These often focus on climate and resource use. Common examples include:
- Carbon intensity (emissions per unit of revenue or investment)
- Renewable energy usage in operations
- Water consumption and wastewater management
- Waste intensity and circular economy initiatives
These metrics are particularly material for sectors like manufacturing, energy, and real estate, where environmental impacts are direct and measurable.
Social metrics
Social indicators assess how companies manage relationships with employees, suppliers, customers, and communities. Common measures include:
- Workforce diversity and inclusion at leadership and overall levels
- Health and safety performance (e.g., lost-time injury rates)
- Supply chain labour standards and human rights policies
These metrics often carry reputational weight and are increasingly tied to regulatory requirements, especially in the EU.
Governance metrics
Governance shapes how a company is run and how it manages ESG risks. Typical metrics include:
- Board composition and independence
- Executive compensation alignment with ESG performance
- Anti-corruption and ethics policies
- Shareholder rights and voting structures
Good governance is often correlated with stronger ESG outcomes overall.
Key ESG benchmarking challenges investors face
Despite its importance, ESG benchmarking is not straightforward.
Data fragmentation and inconsistency
ESG information comes from annual reports, sustainability disclosures, third-party data providers, and voluntary initiatives. Only about 40% of organizations can automatically source sustainability data. Manual collection slows the process and increases the risk of errors.
Misalignment in ESG ratings
Different ratings agencies use different methodologies, weightings, and data sources. Studies show ESG ratings from different providers don’t always align, and the accuracy of ratings has been called into question. This inconsistency can create confusion for investors and undermine trust in the results.
Variable disclosure quality
In some sectors, especially extractives or heavy industry, companies may provide extensive, audited ESG data. In others, particularly in emerging markets or among smaller firms, disclosures may be minimal or missing altogether. This uneven playing field complicates cross-portfolio comparisons.
Risk of greenwashing
When benchmarking is based on incomplete or selectively presented data, it can create a false sense of progress. Without robust methodologies and transparent assumptions, ESG benchmarks risk becoming a marketing tool rather than a decision-making asset.
How ESG benchmarking fits into the investment process
ESG benchmarking supports decision-making at every stage of the investment lifecycle:
- Screening: Identifying companies or sectors that meet minimum ESG criteria before deeper analysis.
- Due diligence: Assessing ESG risks and opportunities alongside financial and operational factors before investing.
- Portfolio management: Monitoring ongoing ESG performance and integrating results into rebalancing and engagement strategies.
- Exit planning: Using ESG performance improvements as part of the value creation story when selling an asset or company.
Step-by-step guide to effective ESG benchmarking
A successful ESG benchmarking process is structured, repeatable, and aligned with your broader investment strategy. The following steps can help ensure it delivers decision-useful insights rather than just a static report.
Step 1: Conduct a materiality assessment
Before collecting data, identify which ESG factors are most relevant to your portfolio’s sectors, geographies, and investment objectives. Materiality assessments help you focus on the issues that are most likely to influence financial performance, stakeholder perception, and regulatory compliance. For instance, water usage might be material for agricultural investments, while data privacy may be more relevant for technology holdings. The output should be a prioritized list of ESG topics to measure and track.
Step 2: Map and collect data
Once priorities are clear, create a data map outlining the sources, formats, and frequency of information needed. This could include company sustainability reports, financial filings, voluntary disclosures, and data from third-party providers. For harder-to-measure areas, such as Scope 3 emissions, you may need to work with portfolio companies to gather primary data or use credible estimation models. A well-organized data collection process reduces duplication, improves accuracy, and makes updates easier in future cycles.
Step 3: Align with frameworks
Choose the ESG standards or benchmarks that will shape your analysis. Some investors prioritize global frameworks like the ISSB standards for comparability, while others prefer sector-specific benchmarks, such as SASB Standards, for deeper insights, or a entirely custom proprietary internal framework. Alignment also makes peer comparisons more meaningful by ensuring metrics are consistent and comparable.
Step 4: Perform peer benchmarking
Compare performance against a relevant peer group, industry averages, or best-in-class leaders. The peer set should be selected based on sector, size, geography, and operating context to ensure meaningful comparisons. Where available, use normalized metrics such as emissions intensity or revenue per unit of energy consumed. For example, a real estate fund might compare building energy use against regional averages, while a bank could benchmark financed emissions against sector leaders with similar lending profiles.
Step 5: Turn insights into action
The ultimate purpose of ESG benchmarking is to inform better investment decisions. Insights should be translated into specific actions, such as reallocating capital toward leaders in climate readiness, engaging underperformers to drive improvements, or setting new portfolio-wide targets. This step should also include integrating ESG performance into investment committee discussions and ensuring accountability for follow-through. Benchmarks are most valuable when they are living tools, revisited regularly to track progress and adjust strategies.
Regulatory alignment: using benchmarking to meet compliance needs
A single, well-designed ESG benchmarking process can often serve multiple compliance obligations. For example:
- CSRD: Portfolio-level benchmarking aligned to the EU Taxonomy can streamline reporting.
- SFDR: Benchmarks can feed directly into Principal Adverse Impact (PAI) statements.
- ISSB standards: A comprehensive benchmark can map metrics to both IFRS S1 and S2, reducing duplication of work.
| Case study: How a leading technology company streamlines ESG benchmarking with Manifest Climate A global technology company faced mounting regulatory disclosure requirements across multiple jurisdictions, from the SEC’s proposed climate rule in the U.S. to Europe’s CSRD. Meeting these varied standards had become a resource-heavy task, requiring teams to manually map disclosures to multiple frameworks and identify gaps. Using Manifest Climate, the company automated its benchmarking process against leading ESG and climate disclosure frameworks. The platform’s AI-powered analysis provided an instant view of alignment with requirements like TCFD, ISSB, and CSRD, and highlighted exactly where disclosures needed strengthening.This allowed the sustainability team to: Save weeks of manual work each reporting cycle by eliminating spreadsheet-based tracking. Ensure global compliance by mapping a single set of ESG metrics to multiple jurisdictional frameworks. Focus on strategic improvements instead of administrative tasks, using benchmarking insights to guide internal policy updates and target-setting. The result was a more efficient ESG compliance process, improved readiness for upcoming regulations, and a stronger foundation for credible, investor-grade disclosures. → Read the case study in full |
Industry-specific applications of ESG benchmarking
- Real estate: Energy use per square metre, building certifications, and climate resilience measures.
- Financial services: Financed emissions by sector, sustainable finance volumes, lending policies, and ESG considerations in underwriting.
- Manufacturing: Waste intensity, supply chain audits, and renewable energy uptake.
- Technology: Data centre energy mix, product lifecycle sustainability, and workforce diversity.
Common mistakes to avoid in ESG benchmarking
Even well-intentioned benchmarking efforts can fall short if these pitfalls are not addressed.
Using outdated data
ESG performance can shift significantly from year to year due to operational changes, new regulations, or market shocks. Relying on old disclosures risks basing decisions on conditions that no longer apply. A company may have improved its renewable energy usage or made material governance changes since the last reporting period.
Benchmarking against irrelevant peers
Comparisons are only meaningful when they reflect a similar context, such as industry, size, geography, and business model. Benchmarking a small regional bank against a multinational asset manager will produce misleading insights. The peer set must match the realities of the portfolio to avoid skewed results.
Focusing only on quantitative metrics
Numbers are critical, but qualitative indicators, like governance culture, stakeholder relationships, or climate strategy robustness, can reveal risks or opportunities that raw data misses. Two companies with similar emissions intensity may differ widely in their ability to adapt to future climate policies.
Treating it as a one-off exercise
ESG benchmarking should be an ongoing process. Markets evolve, regulations tighten, and companies change their practices. Continuous monitoring ensures investors can respond quickly to risks or capitalize on emerging opportunities, rather than being caught off guard.
The future of ESG benchmarking: trends to watch
The next five years will see ESG benchmarking evolve into a more dynamic, real-time discipline driven by technology, regulation, and investor demand. Key trends include:
AI and advanced analytics
Artificial intelligence will automate more of the benchmarking process, from scraping and validating ESG data to providing predictive insights. For example, AI can flag companies likely to fall short of climate targets based on historical performance and market trends.
Satellite and geospatial data for verification
Remote sensing technologies can verify environmental claims, such as monitoring deforestation, tracking methane emissions, or assessing the climate resilience of physical assets. This makes reported data more trustworthy and reduces the risk of greenwashing.
Blockchain for supply chain transparency
Distributed ledger technology can create immutable records of sustainability data across supply chains, making it easier to verify ESG claims from raw materials to finished products. This is particularly relevant in industries with complex sourcing, like apparel and electronics.
Greater Scope 3 emissions transparency
Pressure is mounting for investors to account for value chain emissions, which often make up the largest share of a company’s carbon footprint. Benchmarking Scope 3 data will become standard for climate risk assessments, especially in high-impact sectors like transportation and agriculture.
Global framework convergence
As the ISSB and other standard-setters drive toward unified ESG disclosure requirements, comparability will improve. Investors will spend less time reconciling metrics across frameworks and more time using benchmarking insights to inform strategy.
Measuring impact alongside risk
The next evolution of ESG benchmarking will involve assessing not just how companies manage risks, but the tangible positive outcomes they deliver, such as renewable energy capacity added, communities supported, or biodiversity restored. This shift will align with growing investor demand for impact-oriented strategies.
Turning ESG benchmarking into a competitive edge
In a crowded market, credible, data-driven ESG performance can set you apart. Research from ESG Advising shows that strong ESG performance often correlates with lower capital costs and improved valuations. Early adopters of robust benchmarking practices are also better positioned to adapt to regulation and shifting market dynamics.
Ultimately, ESG benchmarking is more than a compliance requirement. It is a strategic tool for building portfolio resilience, improving stakeholder trust, and identifying long-term value creation opportunities.
Create real-time ESG benchmarks with Manifest Climate
Manifest Climate helps investors and companies benchmark ESG performance quickly, accurately, and in line with the world’s leading disclosure frameworks or proprietary internal custom methodologies.
Our AI-powered platform eliminates manual complexity, identifies gaps, and turns your ESG data into actionable insights for compliance, risk management, and value creation.
Book a demo to see how Manifest Climate can help you strengthen your ESG benchmarking today.
