Today at RealClearMarkets, NLPC Corporate Integrity Project associate director Luke Perlot writes that the major ratings agencies are trafficking in scores for Environmental, Social and Governance investment priorities into their overall credit scores for corporations. An excerpt:
S&P and others rate thousands of corporations on their efforts to promote ESG. The scores inform “sustainable” investing decisions and determine inclusion in indices like the S&P 500 ESG Index, which is offered by S&P Global subsidiary S&P Dow Jones Indices.
S&P Global’s other notable subsidiary is S&P Global Ratings. That arm of the firm pushes so-called sustainability as well, incorporating ESG metrics into credit ratings. While firms like BlackRock have been criticized for their promotion of ESG, the equally influential credit rating agencies have gone largely unnoticed.
In January 2019, Fitch Ratings announced it would publish ESG Relevance Scores. Moody’s and S&P soon followed with their own relevance scores, called Credit Impact Scores and Credit Indicators, respectively. These “Big Three” credit rating agencies control 95 percent of the market…
Impact factors are highly politicized. Environmental considerations are obvious, but the Big Three also use vague terms like “demographic and societal trends” or “social capital” issues to disguise their social impact criteria. S&P provides some context on its “Social Equity” page. According to the firm, “social issues are controversial at times, yet stakeholder capitalism, gender and racial diversity, and income inequality are driving investment and innovation in markets.”
But how does racial diversity affect debt repayment capability? The Big Three punish corporations for taking the “wrong side” on controversial issues that are unrelated to their business performance.
Read Luke’s full commentary at RealClearMarkets.
