Why Your Emissions Footprint Could Be Foggy

Explaining its new emissions reporting rules, the SEC (Securities and Exchange Commission) believes investors need to have climate change information. They want us to know that a liter of Coke creates 346 grams of carbon dioxide emissions.

But there is so much more.

Emissions Reporting

Because climate change impacts a company’s risks, spending, and strategies, it affects its financial results. At first it all sounds so very clear. Reporting should include Scope 1 and Scope 2 emissions but not Scope 3.

Coca-Cola explained its interpretation of each Scope:

Using the Scope 1 and 2 lens lets companies like Coca-Cola and Chipotle present one rather persuasive number. In 2022, Coca-Cola recorded 4.4 million metric tons for Scope 1 emissions, 3.5 million metric tons for scope 2 emissions, and 57.0 million metric tons for scope 3 emissions. Correspondingly, for the same year, Chipotle reported 137,178 metric tons for Scope 1 emissions and a Scope 2 total of 141,433 metric tons (location-based).

Starting on the farm, the problem though is that some companies might have measured the irrigation that was sprayed while others did not. Moving to transport, some could have included refrigeration. As for progress, it all depends on your base year.

Our Bottom Line: The SEC

Responding to conflicts of interest, inaccuracies, and fraud, the U.S. Congress created a securities industry watchdog in 1934. Since then, the SEC has standardized what financial disclosure documents would say. They told us what investors needed to know and could depend on.

With companies expressing data about the past, present, and future in their disclosure documents, certainly climate change has become relevant. Or, as SEC Chair Gary Gensler expressed “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.”

However, this 2022 paper from an MIT group at its Sloan School displayed the cloudy side of the SEC’s emissions rules. Listing the three areas that create inconsistent ESG ratings, they focused on scope divergence, measurement divergence, and weight divergence. With scope divergence, ratings depend on what you choose to measure. Then, creating measurement divergence, they could use different indicators to measure the same phenomenon. And finally, adding to the confusion, you have to decide how much to weight a number.

Although the SEC expressed its new rules in a 886 page document, still I suspect scope, measurement, and weight will vary.

My sources and more: For starters, I recommend the SEC’s summary of its new disclosure rules Next, for a deeper dive, they published  886 pages of details.. In addition, this NY Times article, and WSJ, here and here are possibilities as is this paper. Also, I suggest skimming what a ratings firm looks at and the Coke and Chipotle perspective.