You may have seen that ESG is becoming a hot potato for companies as the scrutiny of both its philosophy and methodology are rising. Now S&P Global (the firm known best for its S&P 500 stock market index) has decided to discontinue its ESG ratings for corporate borrowers. Patrick Temple-West reports in the Financial Times:
S&P Global has stopped handing out scores to corporate borrowers on ESG criteria, at a time of rising questions about their utility and political attacks on such metrics.
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.
S&P is influential, with debt ratings that can affect a company’s borrowing cost. As Republicans target Wall Street’s use of ESG more broadly, conservative state attorneys-general last year opened an investigation into S&P’s use of the factors.
Tom Lyon, a professor at University of Michigan’s business school who has studied ESG ratings, said the S&P move was “just the latest example of a company crumpling in the face of these Republican attacks”.
Their attacks have also overshadowed real concerns about ESG ratings sold by S&P and other financial firms, Lyon said. “They are not that reliable and they disagree.”
The move comes amid scepticism over ESG ratings from some investors. Marcus Moore, a portfolio manager for Osterweis in San Francisco, said he does not pay much attention to specific ESG credit scores from rating agencies and that the numbers should not be a deciding factor for investors.
Action Line: Your Survival Guy has been warning readers about ESG for a long time. If GOP efforts to stop ESG are working, and financial companies like S&P Global are finally getting the idea, that’s a good sign. If your financial adviser tries to sell you an ESG fund, ask them why you’d want to give up voting control of your shares to someone who could put their political cause ahead of your retirement goals. When you’re ready to talk to someone who is legally bound by a fiduciary duty to serve his clients’ best interests, I’m here.
