How ESG ratings can miss the largest carbon emitters

New European study estimates the true cost of Scope 3 emissions.

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Examples of upstream Scope 3 emissions sources could include business travel by means not owned or controlled by an organization. Photo: Blink O'fanaye/flickr.

(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns. He can be reached at mark@hulbertratings.com)

CHAPEL HILL, N.C. (Callaway Climate Insights) — Ready for today’s climate finance pop quiz?

Which of the following companies would be better for the climate?

• Company ABC, which produces relatively few direct greenhouse gas emissions (GHG), but whose manufacturing supply chain involves a high level of indirect GHG emissions?

• Company XYZ, which is just the opposite of ABC, having a high level of direct GHG emissions but a low level of indirect emissions?

It’s a tossup, of course. The climate doesn’t care whether the ton of carbon that reaches the atmosphere comes from direct or indirect sources.

Nevertheless, most ESG rating agencies would rate Company ABC as better for the climate. That’s because those agencies typically focus only on Scopes 1 and 2 of a company’s carbon footprint, which reflect direct GHG emissions. Scope 3, which encompasses indirect emissions, is far more often than not simply ignored because most companies don’t report their Scope 3 emissions.