The Blubber

S&P Global has opted to discontinue the practice of assigning numerical scores to corporate borrowers based on their ESG (Environmental, Social, and Governance) criteria. This decision reflects a growing sense of uncertainty regarding the usefulness and relevance of such ratings. Until now, the debt rating agency had been using a scoring system ranging from one to five since 2021 to assess companies' exposure to ESG risks.

For instance, payment giant Visa received a score of two for both environmental and social factors, along with a three for governance. On the other hand, Ohio-based utility company FirstEnergy, which faced allegations of corruption, was given a four for governance – the second lowest grade according to S&P.

However, in a recent development, S&P has announced a shift in its approach. Rather than providing numerical scores for ESG evaluations, the agency will now furnish textual analyses. In a statement, S&P explained that they found the detailed analytical paragraphs in their credit rating reports to be more effective in delivering transparency and depth regarding ESG credit factors pertinent to their rating analysis.

Interestingly, this move by S&P Global diverges from the stance taken by Moody’s, its counterpart in the debt rating field, which continues to employ a one to five rating scale for ESG factors. Given that S&P's ratings wield significant influence, impacting companies' borrowing costs, it's worth noting that conservative state attorneys-general launched an inquiry into S&P's utilization of ESG metrics last year. This occurred amid a broader critique of Wall Street's handling of ESG matters from Republican quarters.

Tom Lyon, a professor at the University of Michigan's business school, regarded this decision as a response to the earlier critiques from Republicans. Echoing similar concerns, Marcus Moore, a portfolio manager at Osterweis in San Francisco, expressed the opinion that ESG ratings should not play a pivotal role in swaying investor decisions. While Andy Brenner from Natalliance Securities supported S&P's move, stating that quantifying ESG is a complex task.

S&P later clarified that their ESG credit indicators were not meant to be sustainability ratings or independent assessments of a company's ESG performance. Instead, they were designed to highlight the influence of ESG credit factors on their rating analysis.