S&P Global has decided to drop ESG scores from credit ratings. The Financial Times reports:
The debt rating agency has since 2021 published scores from one to five for a company’s exposure to each element of environmental, social and governance risks.
Payments company Visa, for example, had received a two for “E” and “S” and a three for “G”. FirstEnergy, an Ohio utility that has been charged with corruption, received a four score for “G”, S&P’s second-lowest grade.
Late last week S&P reversed course, saying that only text, not numerical scores, would comprise analysis of a company’s ESG matters.
“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,” the rating agency said.
The U-turn puts S&P at odds with debt rating rival Moody’s, which still rates ESG criteria on a one to five scale.
On August 4, Real Clear Markets published an op-ed written by Luke Perlot, associate director of NLPC’s Corporate Integrity Project, which criticized the use of subjective sustainability measures to dictate financial decisions:
The use of ESG factors to determine credit ratings presents a significant ethical concern. For example, as of July 24, the ICE BofA AA US Corporate Index yielded 4.91 percent, while the corresponding Single-A Index yielded 5.35 percent. That’s a significant jump in the cost of debt for just one downgrade. Yet the Big Three have no issue strong-arming corporations into ESG compliance and punishing corporations that fail to meet sustainability standards with higher financing costs.
ESG factors should not be used to make financial decisions that address matters like companies’ abilities to borrow and repay money. In spring 2022, top elected officials in Utah and Idaho demanded S&P quit using sustainability factors in state credit ratings, but their demands haven’t moved the needle yet.
The tide is turning against ESG. Under intense criticism from journalists and lawmakers alike, BlackRock CEO Larry Fink has stopped using the term. Executive diversity officers are leaving in droves. Congress is finally acting to limit the power of proxy advising duopoly Glass Lewis and ISS.
It’s time to apply the same scrutiny to the Big Three credit rating agencies.
After a multi-year march of dominance through financial institutions and corporations, ESG is increasingly falling on hard times the last couple of years.
