S&P Global, a ratings agency, will no longer be handing out numerical ESG scores to issuers of corporate debt. ESG, of course, is an investment ‘“discipline” that, in part, rates companies by how well they measure up against various and varying environmental, social, and governance benchmarks. S&P Global’s move is a small, welcome sign that the pushback against ESG may be beginning to have an effect.
The agency has, like so many participants in the financial sector, turned to ESG as a source of revenue. Now, it will no longer be grading borrowers on a scale ranging from 1-5 (with 1 being the highest) for how well they do in meeting each of the standards used by S&P for the E, the S, and the G. Hard numbers give the misleading impression that these are objective standards. Even in areas where it is possible to find (somewhat) “real” numbers, such as the amount of greenhouse-gas (GHG) emissions for which a company is responsible, there is disagreement not only over which numbers should count, but on their relative importance. Thus, in looking at a company’s GHG emissions, how to weigh “Scope 1” emissions (direct emissions) against “Scope 2” emissions (emissions generated by the production of energy a company uses) and against the notorious catch-all “Scope 3” emissions (other emissions generated in the company’s value chain, whether in the production of products used by the company, or in the use by customers of the company’s products)?
There is, however, one thing that Scopes 1, 2, and 3 have in common: Absent rules and regulations imposing material charges on such emissions, they have nothing to do with a company’s ability to repay its debt in full and on time. And those are the only considerations that, except in the case of specialist “socially responsible” lenders, should matter. With the exception of some aspects of G (governance), the same is true of the rest of ESG.
This raises the question why S&P has been, other than in the case of those specialist lenders (or, in the secondary markets, investors), providing its clients with useless and possibly distracting ESG ratings. The answer is fashion, fees, and the furtherance of the progressive political agenda contained within ESG. Naming and shaming low-scoring borrowers or potential borrowers is a means of scaring away sources of capital from these supposed miscreants and thus “encouraging” them to change their behavior.
That S&P has been indulging in this behavior is reprehensible, but they have not been alone. Their two principal competitors have also boarded the ESG train. As those who can remember the way that all three handed out wildly inflated ratings to mortgage-backed securities will recall, ratings agencies have a way of hunting in packs.
But any indications of a “retreat” from ESG shouldn’t be exaggerated. ESG is a source of jobs, profit, and power for too many people and businesses to be abandoned lightly. It is more likely that any purported change of direction will be little more than camouflage designed to deceive its critics. Expect to hear less about ESG and more about “sustainable investing” in the future.
And so, in the case of S&P, the numbers may have gone, but the letters, so to speak, will remain. S&P’s descriptions of borrowers will continue to include passages that relate to ESG: “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, and these will remain integral to our reports.”
Dropping the numbers, S&P claims, will not affect its “research and commentary on ESG-related topics, including the influence that ESG factors can have on creditworthiness.” Translation: There will be little or no real change. But to look on the bright side, the fact that S&P now believes some camouflage is needed is indeed a small sign of progress.