S&P Global Takes a Step Back from ESG

S&P Global Inc., a leading global credit ratings provider, has taken a noteworthy step by announcing it will no longer include ESG (environmental, social, and governance) scores alongside its credit ratings. This significant change, announced on August 4, 2023, comes as a direct response to investor feedback, with many expressing confusion over the integration of these scores in the company’s corporate credit ratings.

A source close to the matter, preferring anonymity, shed light on the decision, stating that investors’ feedback leading to this change has not yet been made public. However, a spokesperson for S&P was quick to clarify that this update won’t alter the company’s core ESG principles, research, or commentary, particularly regarding their potential impact on creditworthiness. “The update does not affect our ESG principles, criteria or our research and commentary on ESG-related topics, including the influence that ESG factors can have on creditworthiness,” the spokesperson said.

In the evolving landscape of credit ratings, companies grapple with the challenge of consistently gauging the long-term financial implications of ESG factors. S&P’s initial attempt to address these concerns involved the introduction of an alphanumerical scale, which was designed to amplify its textual representation of an issuer’s ESG credentials. However, this approach faced resistance from investors, leading to its discontinuation in favor of text-only descriptions.

Introduced by S&P Global Ratings in 2021, ESG indicators mirrored similar initiatives by Moody’s Investors Service and Fitch Ratings. These scores aimed to provide a clear and visual representation of the importance of ESG factors in credit rating analysis. Yet, the effectiveness and clarity of these ratings, especially concerning risks associated with climate change, have been under scrutiny. The European Central Bank, in a report from September the prior year, revealed that there is a glaring inadequacy in their climate-related assessments.

Moreover, research from Cambridge University’s economists highlighted a potential oversight in current credit ratings. They found that issuers might incur billions in additional interest costs due to climate change – a financial repercussion that current ratings might not fully encapsulate.

Patrick Welch, the chief ESG and ratings policy officer at Kroll Bond Rating Agency, voiced skepticism about integrating ESG scoring frameworks within credit ratings. Using a 1-to-5 scale, Welch argued, results in embedding one scoring system within another, leading to potential misinterpretations. “It raises confusion – are you talking about financial risk to the company, or also its impact on society and the environment?” Welch pondered.

On the political front, S&P faced backlash from Republican quarters over the perceived politicization of ratings. Utah’s leadership expressed their disapproval last year when S&P chose to unveil ESG indicators for U.S. states. Nevertheless, the source clarified that this recent change in S&P’s approach to ESG indicators isn’t tied to any political or legal challenges.

See original story at Yahoo.com.

Jack McPherrin ([email protected]) is a managing editor of StoppingSocialism.com, research editor for The Heartland Institute, and a research fellow for Heartland's Socialism Research Center. He holds an MA in International Affairs from Loyola University-Chicago, and a dual BA in Economics and History from Boston College.