S&P Global has made the decision to stop providing numerical scores to corporate borrowers based on ESG criteria.
This comes amid growing uncertainty surrounding the efficacy and relevance of such ratings. Since 2021, the debt rating agency assigned scores ranging between one to five, evaluating companies on their exposure to ESG risks.
As an illustrative example, payments giant Visa received a score of two for both environmental and social factors and a three for governance. In contrast, Ohio-based utility company FirstEnergy, which faced corruption charges, was assigned a four for governance, which is the second lowest grade by S&P.
However, in a recent turn of events, S&P announced that it would now only provide textual analysis rather than numerical scores when reviewing a company’s ESG matters. In a statement, the rating agency mentioned, “We have determined that the dedicated analytical narrative paragraphs in our credit rating reports are most effective at providing detail and transparency on ESG credit factors material to our rating analysis.”
Interestingly, this move by S&P Global differs from the approach taken by its debt rating counterpart, Moody’s, which continues to rate ESG factors on the one to five scale. S&P’s ratings are influential, impacting borrowing costs for companies. It’s worth noting that last year, conservative state attorneys-general initiated an investigation into S&P’s use of ESG metrics amidst a broader critique by Republicans on Wall Street’s ESG usage.
University of Michigan’s business school professor Tom Lyon viewed this step as a response to the aforementioned Republican critiques. Further echoing these concerns, Marcus Moore, a portfolio manager at Osterweis in San Francisco, opined that ESG ratings should not be pivotal in influencing investors. While Andy Brenner from Natalliance Securities supported S&P’s move, stating that ESG is challenging to quantify.
S&P later clarified that their ESG credit indicators were neither sustainability ratings nor independent evaluations of a company’s ESG performance. They were designed to highlight the impact of ESG credit factors on their rating analysis.
David F. Larcker, a professor at Stanford’s graduate school of business, pondered whether S&P’s decision hints at the diminishing value of these ratings or if it’s merely a reaction to mounting external pressures.
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