What an ESG Score is Missing

As a liter of Coca-Cola moves from the farm to a bottler to a supermarket, it creates 346 grams of carbon emissions. Yes?

Maybe.

It all depends what you count.

ESG Scores

When Coca-Cola talks about emissions, its numbers include factory ingredients, packaging, delivery, refrigeration. It refers to its own operation and the bottlers that its does not own.

But they can also be rated on their emissions intensity:

Asked to give Chevron an ESG score (Environmental, Social and Governance), three ratings companies disagreed.  Rather like Goldilocks, one rating was high, a second was low, and the third was in the middle.

Below, the dots represent the ESG scores for Exxon Mobil and Chevron from three ratings firms:

Chevron’s ESG scores varied because the ratings firms emphasize different criteria. One cared more about Chevron’s diversity. Another weighted its fossil fuel dependence more heavily. For other firms, they even added in commuting emissions.

The different definitions of ESG are a topic at the SEC (Securities and Exchange Commission). Saying that voluntary reporting on climate risks creates inconsistencies, SEC Chair Gary Gensler expressed the need for a rule by the end of the year. Quite basic, one concern is how ESG criteria and data vary among the asset managers that refer to sustainability-related investing. Gensler said that “Companies and investors alike would benefit from clear rules of the road” that relate to how climate change affects a firm’s finances and risks. His goal is standardized disclosure that will be “decision useful.”

Our Bottom Line: Marginal Analysis

Economists tell us that we are always thinking at the margin. Defined as where something extra happens the margin can be tangible or imaginary. It can be an extra luggage fee from an airline, extra minutes of sleep from a snooze alarm, or extra calories. When students decide how much extra time they need to study, they are thinking at the margin as is the Congress when it votes on an infrastructure spending plan.

We are also thinking at the margin when we determine a firm’s ESG (Environmental, Social, and Governance) score. The margin is our focus because we care about the extra emissions a firm creates and how much extra it is doing to mitigate its environmental impact.

So, returning to where we began, Coca-Cola has an emissions score that will get combined with its ESG evaluation. The question though is what the metric at the margin should be. We need to decide what we should see at the margin.

My sources and more: Yesterday’s WSJ started me thinking about emissions scorecards. From there, it was helpful to see how Coca-Cola does its own calculations and then what a ratings firm looks at. Completing the picture, CNBC presented what the SEC was saying. Our featured mage is from WSJ.