S&P Global, the renowned ratings agency, has announced that it will cease the use of alphanumeric ESG scores in its credit quality assessments. This decision comes in response to growing backlash against environmental, social, and governance (ESG) investing.
Instead of publishing new ESG credit "indicators," which are rated on a scale of one to five, and updating existing ones, S&P Global will rely on the analytical narrative paragraphs in its credit rating reports. These paragraphs are more effective in explaining how ESG factors influence the agency's credit analysis, according to a statement released by the firm on Friday.
It is important to clarify that the alphanumeric ESG credit indicators introduced by S&P Global in 2021 were not sustainability ratings or an evaluation of an entity's ESG performance. Rather, they were intended to illustrate and summarize the relevance of ESG credit factors in the agency's rating analysis.
The statement from S&P Global emphasizes their commitment to providing transparency on how and when ESG factors impact their assessment of creditworthiness.
This move comes at a time when ESG investing has faced increased scrutiny. Conservative lawmakers and attorneys general have argued that non-pecuniary considerations, such as environmental and social issues, can have a negative impact on investor returns.
In fact, earlier this year, Florida Governor Ron DeSantis signed a bill into law that restricts the consideration of ESG factors in various investment contexts. The bill prohibits state and local entities from entering into contracts with rating agencies whose ESG scores could potentially harm the issuer's bond ratings. This legislation took effect on July 1.
Andrew Poreda, Senior ESG Research Analyst at Sage Advisory, suggests that there may be political motivations behind S&P Global's decision to discontinue the use of ESG credit indicators. He points out that if the agency truly believed that ESG scores were of limited value, they would have also ceased their other offerings related to ESG ratings.
In conclusion, S&P Global's decision to abandon alphanumeric ESG scores in credit analysis reflects the changing landscape and increased scrutiny surrounding ESG investing. The agency believes that the analytical narratives in their credit rating reports provide a more effective approach to explaining the impact of ESG factors on credit analysis.
The Future of ESG Credit Indicators
S&P Global Stays Independent, Others Follow Suit
S&P Global recently made the decision to halt its publication of ESG credit indicators. When asked about the role of political considerations, the company stated that this move was purely an independent, analytical decision.
However, it's worth noting that S&P Global's business division, Sustainable1, will continue to offer an ESG Rating product. This indicates that other credit ratings firms may also face similar pressures.
Fitch Ratings Stands Firm
Contrary to S&P Global, Fitch Ratings has decided to retain its ESG scores in its credit ratings. Richard Hunter, the chief credit officer at Fitch Ratings, believes that numeric scores are crucial as they clearly indicate rating changes driven by specific factors.
According to Fitch, disclosing information in text format has its limitations and may not effectively cover the monitoring needs of investors with vast portfolios.
Florida's Anti-ESG Bill and its Impact
With the introduction of Florida's anti-ESG bill, concerns have been raised regarding its potential impact. Fitch Ratings confirmed that the bill's ESG Relevance Scores do not drastically alter their rating assignment process. These scores are seen as mere observations rather than additional criteria.
Moody's Investors Service Emphasizes Inclusion
Moody's Investors Service assured that they incorporate all risks, including ESG-related risks, into their credit ratings as long as they are deemed significant. They also disclose ESG scores on a scale of one to five.
Consistency at DBRS Morningstar
DBRS Morningstar underscored its commitment to evaluating and integrating ESG risks into their credit ratings. As one of the leading providers of financial indexes and ESG ratings, MSCI did not provide a comment on this matter.
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