S&P Global has made a significant decision to discontinue assigning scores to corporate borrowers based on ESG (Environmental, Social, and Governance) factors. This shift comes as a response to criticism from political groups and ongoing debates about the value and efficacy of such scores.
Since 2021, S&P Global had utilised a scoring system ranging from one to five to evaluate a company’s ESG-related risk, with a lower score indicating lower exposure and a higher score indicating greater risk.
However, the company recently altered its approach. In an announcement on Friday (August 4), S&P revealed that it would now provide ESG analysis solely through textual descriptions, eliminating the use of numerical scores, and implementing this change “immediately.”
S&P justified this reversal by stating, “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.”
This shift in stance sets S&P apart from its counterpart Moody’s, another key debt rating agency, which also employs a one-to-five scale to rate ESG factors. Debt ratings hold significant influence over a company’s borrowing costs, rendering them a powerful metric.
Criticism of ESG ratings has been particularly pronounced among Republicans in the United States, who perceive ESG factors as a covert means of promoting liberal values. In the past year, conservative state attorneys-general launched an inquiry into S&P’s utilisation of ESG criteria.
Tom Lyon, a professor at the University of Michigan’s business school with expertise in ESG ratings, highlighted that S&P’s decision appears to be a response to pressure from Republican critics. He noted that these political challenges have overshadowed genuine concerns about the reliability and consistency of ESG ratings provided by S&P and other financial entities.
S&P emphasised that its decision does not impact its ESG principles criteria, its research, or its commentary on ESG-related subjects. The company clarified that its ESG credit indicators were not intended to serve as standalone sustainability ratings or comprehensive assessments of a company’s ESG performance. Instead, they were designed to succinctly illustrate the relevance of ESG credit factors in their rating analysis.