Credit ratings agency Standard & Poor’s has ditched numerically ranking corporate borrowers on their ESG risks amid a broader debate over ethical investing.
Environmental, social and governance scores gained popularity in recent years by capturing risk factors such as costly CO2 emission legislation and pending class action lawsuits, which had previously mystified even professional money managers.
The ratings division at S&P Global Inc had attempted to boil down each of the three ESG risks to a number on a scale of 1-5.
Yet just two years after introducing the ratings, the team announced the move had not been accepted by their customers.
Speaking to the Financial Times, the head of international fixed income at Natalliance Securities agreed with the decision. “I think it’s an overrated concept,” said Andy Brenner.
Confusion had swirled around the ratings system—many mistook the numeric grade as being tantamount to the kind of controversial ESG scores that saw Tesla get booted from an S&P sustainability index last year while oil giant Exxon Mobil was allowed to remain.
In reality, it was simply a way of measuring the impact of risks when judging whether a company would pay back its debt and no attempt to rank it as an ethical investment.
Another part of the parent company, namely S&P Global Sustainable1, is responsible for the kind of scoring that had Musk fuming “ESG is a scam" and "ESG is the devil"—even after Tesla was included once more in the sustainability index in June.
Lately corporate boards aiming to score highly as an ethical investment has become a flashpoint for debate in the finance community, with critics dubbing the practice as “woke capitalism”.
ESG scores have been blamed for everything from Hollywood flops to the boycotts of Bud Light and Target. Some legislators have even attempted to pin the blame for Silicon Valley Bank’s collapse on ESG diversity policies rather than its failure to hedge its interest rate exposure.
S&P Global Ratings said it will continue to provide analysis of the credit risks stemming from ESG-related issues, they just won’t be given a simple grade.
“After further review, 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,” the company said.
