On August 8th 2023, S&P Global Ratings announced that they would no longer publish ESG credit indicators in new credit rating reports.
Why did S&P decide to make this change? Is this the beginning of the contraction of the ESG rating and ranking market? Was this caused by the intense political pressure these agencies and ESG in general is currently facing? Or was this a natural and positive pruning within the rating landscape of a less than useful indicator?
It is likely a little bit of all of the above, but it is worth teasing apart these ideas to get a fuller picture of what led to this decision and what it might tell us about the current ESG ratings landscape.
It is worth noting that S&P Global Ratings (credit rating agency) is a separate division from S&P Sustainable1 which operates the S&P Corporate Sustainability Assessment (“S&P CSA” or “DJSI,” a reference to the associated Dow Jones Sustainability Indices), which is not at all impacted by this change.
S&P Global Ratings was the third credit rating agency, behind Fitch Ratings and Moody’s Investors, to develop and issue ESG credit indicators. The goal of these credit indicators is summarizing the assessment of an organization’s creditworthiness based on ESG criteria. The S&P ESG credit indicators were a numeric ranking of 1 – 5 and an attempt to provide a topline summary of the relevance of S&P’s ESG credit factors assessed in its more in-depth qualitative rating analysis.
The rating agency has decided to halt its use of quantitative indicators, suggesting that its qualitative ESG analysis provides more useful context in the absence of a numeric score.
Although it has been suggested that the intensely politicized environment around ESG might have played a role in the removal of this quantitative metric, it is likely that this move was reflective of the relative usefulness of S&P’s quantitative ESG rating in credit decisions, rather than a referendum on the value of ESG analysis overall. The demand for ESG information among investors remains high as the market for ESG-focused institutional investment is predicted to continue its growth. (e.g., ~84% to US$33.9 trillion in 2026 – PWC).
With the slow but steady movement toward standardization of mandatory ESG disclosure and reporting requirements it is reasonable to assume that the value of ESG ratings could be on the decline, but we aren’t quite there yet. The SEC is scheduled to provide an update this fall while the EU Commission adopted the European Sustainability Reporting Standards in July (2023).
All pathways toward a standard set of mandatory ESG disclosures are rolling out over several years, so raters and rankers still have a few years to act. Even then, however, financial institutions and rating agencies will likely still have their own interpretation of the more standard set of information available and how to analyze the data to identify leaders and laggards. Change often feels fast and abrupt, but more often plays out slowly and incrementally.
In this environment of uncertainty and change, organizations should continue to develop and implement systems for managing and disclosing ESG data in preparation for mandatory disclosure requirements while also keeping an eye on the evolution of the ESG ratings landscape over the next few years.