What Does Carbon Data Tell You (or Not)?

Abstract

This study empirically assesses the consistency of carbon-related ratings with a firm’s actual carbon performance. Using carbon emission measures of Trucost (S&P Global) and carbon-related ratings from four widely used databases, KLD, ASSET4 (Refinitiv), MSCI ESG IVA, and Sustainalytics, we evaluate whether and in what aspects these ratings explain a firm’s past carbon footprints (i.e., backward-looking evaluation) and predict a firm’s future carbon footprints (i.e., forward-looking evaluation). We find that KLD environmental concern ratings well capture a firm’s past and future carbon emission levels and growth rates, while KLD environmental strength ratings do so only for growth rates. Sustainalytics’ carbon intensity-related scores provide a good summary of a firm’s past carbon footprint but do not predict future performance. We also find suggestive evidence of a firm’s deliberate reporting behavior depending on the types of emissions and industries. Our empirical findings are more pronounced in Scope 1 and 2 than in Scope 3, and they become less prominent in high-emitting industries under public pressure. We discuss how academic researchers and investors can use these carbon-related ratings for their intended purposes.

Keywords: carbon emission; corporate carbon performance; corporate sustainability; ESG rating; carbon disclosure; greenwashing