December 7, 2023

S&P Global will stop using alphanumeric ESG scores when assessing credit quality, an about-turn that comes amid a backlash against environmental, social, and governance investing.

In a statement released Friday, the ratings agency said it would no longer publish new ESG credit “indicators”— which come on a one to five scale—or update the outstanding ones. Instead, the analytical narrative paragraphs in its credit rating reports are more effective at explaining how ESG factors affect its credit analysis, the firm said.

S&P has been publishing the alphanumeric ESG credit indicators since 2021. These aren’t sustainability ratings nor an assessment of an entity’s ESG performance, a spokesman told Barron’s. Rather, they were “intended to illustrate and summarize the relevance of ESG credit factors on our rating analysis.”

“S&P Global Ratings remains committed to providing the market with transparency on how and when environmental, social and governance (ESG) factors influence our assessment of creditworthiness,” according to the statement.

ESG investing has been under increasing scrutiny since last year, as conservative lawmakers and attorneys general claim that non-pecuniary considerations such as environmental and social issues would hurt investor returns.

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Earlier this year, Florida Gov. Ron DeSantis signed the into law a bill that restricts consideration of ESG factors in various investing contexts. For one, it prohibits state and local entities from entering into contracts with rating agencies whose ESG scores could negatively impact the issuer’s bond ratings. The bill took effect on July 1.

“It certainly looks like this is politically motivated,” Andrew Poreda, senior ESG research analyst at Sage Advisory, says of the S&P decision to drop ESG credit indicators. “If S&P actually thought ESG scores weren’t useful, they would have ceased their other ESG ratings offerings,” he told Barron’s in an email.

Asked if political considerations played a role, S&P Global told Barron’s that the decision to stop publishing ESG credit indicators “is an independent, analytical decision.”

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A separate S&P Global business, Sustainable1, has an ESG Rating product and will continue the offering, according to the company’s spokesperson.

Other credit ratings firms might be subject to the same pressures.

Fitch Ratings says it isn’t dropping ESG scores from its credit ratings. Richard Hunter, chief credit officer at Fitch Ratings, says a numeric score “crisply identifies individual issuers with actual rating changes that can be classified as driven by a factor.”

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“Fitch believes that there are profound limits to what text disclosures can do for investors monitoring an entire portfolio of hundreds of serviced issuers and bonds,” he said.

Asked about the impact of Florida’s anti-ESG bill, a Fitch spokesperson said: “ESG Relevance Scores do not fundamentally change the way we assign ratings, and are an observation, rather than a new or additional set of criteria.”

In a statement emailed to Barron’s, Moody’s Investors Service said the firm “incorporates all risks, including those related to ESG, into its credit ratings when they are material” and publishes ESG scores on a one to five scale.

DBRS Morningstar said it will continue to evaluate and incorporate ESG risks in the assessment of its credit ratings. MSCI, another leading provider of financial indexes and ESG ratings, didn’t respond to a request for comment.

Write to Lauren Foster at [email protected] and Evie Liu at [email protected]

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