S&P ESG rating story exposes serious vulnerabilities

Global information and analytics firm S&P Global has dropped ESG scoring from its debt rating activity. 

From now on, only text-based evaluation will provide insights into the ESG risks of any firm it analyses. 

“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 agency said in a statement.

• The scoring system, which ranked companies from 1 (best) to 5 (worst) in each of “E”, “S”, and “G”, was only implemented in 2021. 
• S&Ps ratings – while not by any means the only rating – can be hugely influential in deciding a company’s credit rating.

One of the world’s biggest rating agencies has just thrown out its only numerical metric for ESG assessment. From now on, the best anyone can hope for from S&P regarding ESG is a brief written summary. 

Investors and other stakeholders often depend on numerical metrics for proper awareness. They contextualise. They establish a base from which to elaborate on more complex opinions. Most of all, they often add weight and importance to decision-making. 

Abandoning its only numerical rating in ESG suggests S&P isn’t confident that it adds any weight or simply wants to be more subtle in its ESG approach. Maybe both.

S&P won’t say for definite, but media and critics have flagged one reason in particular: ESG backlash. 

It’s heavily prominent in the United States. The Republican Party is solidifying around an anti-ESG stance as one of its main arguments, fuelled by leaders such as Texas and Florida governors Gregg Abbott and Ron DeSantis. 

In their eyes, ESG is “woke” and an infringement on the free-market and maximum shareholder return.

Pretty sure. Last year, S&P became the subject of a Republican-led investigation precisely because of its ESG scoring system. 

This latest news coincides with other efforts by significant companies to distance themselves from the ESG spotlight. Remember in June, when BlackRock CEO Larry Fink said he now refused to use the term “ESG” because of how weaponised it had become?

Meanwhile, critics appear clear that S&P’s move is an obvious response to the right-wing backlash. 

“[It’s] just the latest example of a company crumpling in the face of these Republican attacks,” University of Michigan business professor Tom Lyon told the Financial Times.

It depends on your outlook because, realistically, even proponents of ESG ratings will have strong criticism. 

There are many ratings to choose from worldwide; all are measured in different ways and give opinions in other contexts. There’s no common standard, sometimes making it hard to judge.

Will S&P’s move kill off the practice of ESG ratings? Probably not. Remember – there are local, US-based political influences here. 

Will it fuel doubt about the quality and reliability of rating systems worldwide – even in the pro-ESG camp? It’s very possible.