Measuring Climate Impact— Emissions Reporting Provides Clearer Picture than ESG

Second, the incentives are murky with fees running higher for ESG funds vs. non-ESG funds. The link between virtuous corporate behavior and financial outperformance over the long term is also murky.  ESG funds tend to be overweight growth and technology sectors, and underweight “old-economy” (value), fossil fuel, and weapons stocks. ESG funds performed well from 2010-2021, but underperformed 2022 YTD, due to rising interest rates and the war in Ukraine.  

Third, ESG measurement is inconsistent more than half the time across rating systems  and is easily gamed by selling “dirty” assets to a third party service provider. Also, ESG frameworks were developed to analyze non-GAAP reported risks to company financial performance. They are not designed to quantifiably measure harmful externalities such as emissions, a direct contributor to climate change. 

Accurately reporting on what is causing the pollution warming the planet is a better way to help the public understand what really is moving the needle on climate change, for better or for worse.

Investors and regulators in the US, EU, Japan, Britain, and elsewhere (Brazil, Hong Kong, New Zealand, Singapore, and Switzerland) are pushing for more standardized and universal emissions/climate risk reporting.

With national governments gridlocked, there is an opportunity for businesses along with state and local governments (SL&G) to take the lead by focusing on measuring emissions and doing it better. California governor, Gavin Newsom, recently signed a budget authorizing $54B in new spending to help mitigate climate change effects. The California Air Resources Board, issued a new mandate requiring 50% of electricity produced by 2030 be drawn from renewable sources.  All new cars sold in the state must be electric or  zero -emission by 2035. Illinois, Nebraska, and New York have passed legally binding clean electricity standards and emissions-reductions targets. (US Climate Policy: Tick, tick boom, The Economist, July 23, 2022, p 22)  SSV actively partners with local governments and agencies on adopting climate friendly building codes and infrastructure.

At SSV’s Sustain-a-Palooza! 2022, David Jaber, founder of Climate Positive Consulting and author of Climate Positive Business, explained how companies can report on what matters most to the climate: Green House Gases. Business’ control GHG emissions which impact global temperatures. Companies may choose from several tried and true frameworks: Science Based Targets, Net Zero, as well as several other reporting and certification programs focused on reducing GHG’s and reducing climate change risk.

Science Based Targets (SBTs) include science based GHG reduction goals that are aligned with the 2015 Paris Agreement goals to limit warming to 1.5 degrees Celsius (e.g. 50% reduction from 202 levels by 2030).  The time frame is 5-10 years.  Emission reductions are required, and no carbon offsets are allowed.  

Net-Zero is another GHG reduction framework that looks further out into the future and does incorporate carbon offsets. While the Net-Zero framework is less specific than SBT’s, there are six ways to evaluate the meaningfulness of Net Zero commitments:  

• Is it about now?  At least a 50% reduction in GHG by 2030
• Is there a plan? Goals should be backed up with credible action plans
• Is it fast enough?  Net-zero needs to be achieved before 2050
• Can you see progress? Look for annual reporting on Scope 1,2, and 3 emissions
• What is covered by the GHG goals?  Look for commitments to address all GHG, including Scope 3
• Is it just carbon offsets?  Reducing actual GHG should be the priority one

Other GHG reduction programs are shown in chart below.