S&P Decision to Ax ESG Scores From Bond Ratings Splits Market

S&P Global Inc.’s surprise decision to stop providing ESG scores alongside bond-issuer assessments has created a divide at the top of the credit-ratings market, as Moody’s Investors Service and Fitch Ratings say they won’t follow suit.

(Bloomberg) — S&P Global Inc.’s surprise decision to stop providing ESG scores alongside bond-issuer assessments has created a divide at the top of the credit-ratings market, as Moody’s Investors Service and Fitch Ratings say they won’t follow suit.

S&P recently updated its approach to incorporating environmental, social and governance considerations into credit ratings, ditching an alphanumerical scale it introduced in 2021 and instead going back to relying only on text descriptions. The decision follows feedback from investors who said they found the ESG scale confusing, according to a person familiar with the process who asked not to be identified discussing private talks.

The S&P move “acknowledges the ‘dirty secret’ that many in sustainable finance have long known: assessing ‘ESG performance’ in a single, transparent metric that gives a clear signal that is useful for investors is simply not possible,” said Andrew Howell, senior director of sustainable finance at the Environmental Defense Fund, a nonprofit whose recent work includes helping advise the US government on the Inflation Reduction Act.

There’s little consensus on how best to measure an entity’s ESGness. This year, regulators in Europe tried to address some of the growing investor confusion by unveiling plans to force data providers to be more transparent and consistent. What’s more, ESG score providers that also sell services such as credit ratings will need to keep those businesses separate to avoid conflicts of interest. 

Including ESG scores in credit ratings is proving particularly sensitive, given the potential to influence an issuer’s borrowing costs.

Some sustainability experts that Bloomberg spoke with said numerical scales aren’t capable of capturing the list of complex factors that ESG represents, which includes everything from climate change to workers’ rights. 

Even so, S&P’s updated handling of ESG in debt ratings now makes it an outlier among the big three in the industry.

Richard Hunter, chief credit officer at Fitch, said investors like the numerical system because it “crisply identifies individual issuers with actual rating changes that can be classified as driven by a factor which has a direct relevance for ESG as well.”

A Moody’s spokesperson said the firm “incorporates all risks, including those related to ESG, into its credit ratings when they are material, and also publishes ESG scores on a 1-to-5 scale.”

Sara Schoen, the founder of Schoen Sustainability, argues that ESG “is inescapably complex but can be simplified and de-complicated far more than it has been to enable reasonable understanding and manageability for all involved,” in a LinkedIn comment responding to S&P’s decision.

Meanwhile, anti-ESG Republicans have lambasted such scores in debt ratings as more evidence of Wall Street’s embrace of so-called woke ideology. Last year, Utah’s governor and its federal lawmakers singled out S&P for its decision to publish ESG indicators for US states, calling it an undue politicization of the ratings process.

And Republicans were quick to claim S&P’s decision to ditch its ESG scale as a victory.

“I applaud S&P’s public comments indicating they are changing course and following the law by putting its shareholders before a political agenda,” Missouri Attorney General Andrew Bailey said in a statement, in which he also characterized ESG as “illegal, woke investing.” 

S&P’s decision to back away from ESG scores in its credit ratings was unrelated to any political threats, the person familiar with the process told Bloomberg. A spokesperson for S&P said the decision to stop publishing ESG credit indicators is “independent” and “analytical.” The spokesperson also said that S&P will “continue to include the dedicated narrative paragraphs focused on ESG credit factors.”

Ethan Powell, chief executive officer of Impact Shares, a nonprofit exchange-traded fund issuer based in Dallas, said S&P’s decision reflects “the difficulty in assigning numerical values to qualitative social and environmental factors.” He also points out that there’s “political and regulatory pressure to better understand and define how ESG is used in the market.”

Meanwhile, the issue continues to divide the wider credit ratings industry. Kroll Bond Rating Agency said it doesn’t use ESG scores because to do so “raises confusion.” DBRS Morningstar also eschews a number scale but applies up to 17 ESG factors including climate risk, human rights and corruption, in its credit ratings.

Daniel Klier, CEO of sustainability data provider ESG Book, said he was “surprised” S&P backed away because the credit rating process is anyway so numerical. S&P should instead have strengthened its ESG scoring system to make it more “objective, transparent and data driven,” he said.

Bloomberg News parent Bloomberg LP and affiliates provide access to ESG data products, including Bloomberg’s proprietary ESG scores. Bloomberg does not calculate ESG ratings.

(Adds S&P response to Missouri AG statement, in 14th paragraph.)

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