Ethical Investors Trim Emissions, But Some Just Relocate

FORD does not build most of what goes into a Ford. The company leans on roughly 1,200 outside supplier firms for nearly 1,000 kinds of materials, a supply chain so sprawling that keeping track of it is a job in itself. New research tracking pollution across more than 40,000 companies worldwide finds that when big, ethics minded investors push a firm to clean up, the firm’s own emissions often do shrink, but a meaningful share of that pollution simply resurfaces at a supplier down the chain, leaving the combined total barely moved. It is the kind of finding that makes you want to ask who, exactly, is keeping score.

Ethical Investors are increasingly seeking to make a positive impact while navigating complex environmental issues.

Ethics minded investing has grown from a fringe concern into a genuine financial force, and the growth curve alone tells the story. ESG (environmental, social and governance) investors, loosely organized under the United Nations backed Principles for Responsible Investment, launched in 2006 with a few hundred billion dollars under management, and by 2021 controlled more than 100 trillion.

The trouble is that most of the tools ESG investors actually use to judge a company barely look past its own front door. Mainstream ESG ratings typically lean on just 3 or 4 indicators to judge a company’s supply chain policies, and rarely examine the suppliers themselves in any real detail, a gap a wide-ranging academic review of the ratings industry has documented in far more detail. Even the most basic pollution figures are patchy: in the dataset behind this study, only 49.8% of firms voluntarily disclosed their own direct pollution, and just 11% disclosed the pollution embedded in everything they buy, the sprawling category known in carbon accounting standards as Scope 3 emissions. That asymmetry, more visibility inside the company than outside it, is exactly the seam this new study set out to probe.

Rather than trust ESG ratings at face value, economists Shipeng Yan of the University of Hong Kong, Fan Zhang of Bentley University and Zhengyu Li of the University of Melbourne went looking for the pollution itself, using actual greenhouse gas data instead of a rating agency’s summary judgment. They leaned on two complementary approaches: a natural experiment built around investor mergers that shifted companies into ESG ownership almost overnight, and a broader observational analysis spanning 72 countries and 73 industries.

The observational analysis, the more statistically robust of the two, found a clear pattern: a one standard deviation rise in ESG ownership was associated with a 5.8% increase in a firm’s outsourced, supply chain emissions, and a 4.6% increase in its combined footprint once supplier pollution was added back in. The company’s own direct emissions did drop in the mergers based analysis, but that same drop did not repeat cleanly in the larger observational sample, where the equivalent figure was not statistically significant. Even the outsourcing effect itself, run back through the cleaner, causal mergers design rather than the broader observational one, came in weaker: a 1.9% rise in supply chain emissions for treated firms, a result that hovered right at the edge of statistical significance rather than comfortably inside it.

Yan says the team went looking here because the usual scorecard had stopped being enough. Earlier work, including a widely cited 2019 study of institutional ownership across 41 countries, had linked investors who signed onto the same responsible investment framework to improved environmental and social scores at the companies they held. “Earlier research often used ESG ratings as the main outcome, which made sense at the time, but we now understand much better both what ratings capture and what they can miss,” says Yan, at the University of Hong Kong. “That made us want to look beyond those metrics.”

The Information Gap That Hides the Pollution

Zoom into the firm supplier relationships themselves, roughly 195,000 pairs spanning 169 countries on the buyer side and 68 on the supplier side, and the same signature shows up: a supplier’s own combined emissions climbed as its buyer’s ESG ownership rose, across every version of the model the authors ran.

Why does oversight break down exactly where it is needed most? Yan’s answer points to a fairly ordinary information gap.

“Investors are set up to understand the companies they own, not to audit every tier of a global supply chain,” Yan says. “Even experienced ESG investors may have good information about a focal firm but only fragmented information about its suppliers. To know whether decoupling is happening, they would need supplier-level data on production, emissions, and sourcing relationships, data that are often incomplete, voluntary, or commercially sensitive. That information gap is part of what makes this form of decoupling possible.”

The study does find two conditions that narrow that gap somewhat. Where an ESG investor’s own portfolio already includes firms rich in green technology, the outsourcing effect eases, and where an ESG investor also happens to hold shares in a company’s suppliers, extending its reach past that company’s front door, the same easing shows up. Both patterns clear conventional statistical thresholds, but the authors are candid that the underlying measures, patent counts standing in for green technology, shared ownership standing in for oversight, are indirect proxies, and they call the results suggestive rather than definitive.

None of this covers the full picture, by the authors’ own admission. Their sample is limited to publicly listed firms and the suppliers those firms are willing to disclose, so pollution outsourcing among private companies, arguably harder to police in the first place, sits outside the analysis entirely.

It’s worth beingclear about how confident this finding actually is. The press release announcing the study describes ESG pressure as something that causes firms to outsource pollution, but the paper’s own causal test only brushed against statistical significance, while its cleanest, most robust numbers are correlational rather than causal, the same kind of fragility a single overlooked accounting assumption can produce in pollution math generally.

What Better Oversight Would Actually Look Like

The implications reach beyond one paper. If mainstream ESG ratings really do skate past supply chains the way this analysis suggests, a rating built mostly on a company’s own operations is measuring only part of the problem, and an investor relying on that rating is, in effect, buying a partial picture. Not unlike a regulator that mistakes a flood of form letters for a genuine groundswell of independent opinion.

Yan’s own prescription is modest rather than sweeping. “The solution is not to expect investors to become procurement specialists,” he says, “but to combine better value-chain disclosure and data with investor engagement, supplier oversight, and support for green technologies.”

The paper’s authors go a step further in their discussion, suggesting that the body that set ESG investing’s original ground rules, the Principles for Responsible Investment, might reasonably tighten what it asks of signatories now that the movement has grown up.

A supply chain, after all, is really just a long chain of somebody else’s smokestacks. Whether an investor ever gets a clear look down that chain, rather than a tidy scorecard about the company holding the other end of it, may end up mattering more than any single ESG rating ever could.

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