Standard and Poor’s says goodbye to numerical scores for ESG metrics

Stop grading with grades 1-5

S&P Global has stopped assigning numerical scores to assess companies’ adherence to ESG indices, which qualify companies based on their commitment to environmental, social and governance issues.

The rating agency introduced numerical ESG credit metrics in September 2021 by rating each corporate ESG action on a scale from 1 (positive) to 5 (strongly negative). These ratings were useful for the credit rating (S&P’s true core business) of the rated companies even though, at the time of introduction, S&P stated that these numerical parameters alone would not influence their credit ratings. Rather, they would have been assessments intended to integrate qualitative information on the impact of ESG factors to assess the solvency of companies.

“This update – explains the rating company – it does not affect the criteria of our ESG principles or our research and commentary on ESG-related topics, including the influence ESG factors can have on creditworthiness.”

Therefore, starting this month Standard and Poor’s has decided to reverse course: the behavior of companies in the ESG area will be understood and evaluated exclusively from textual analysis, and no longer numerical, of the actions introduced by companies. “We have established that the ad hoc analytical narrative paragraphs contained in our credit rating reports – the agency said – are the most effective tool for providing detail and transparency on ESG credit factors”.

S&P’s change of course is not shared for the moment by the other major rating agency Moody’s which continues to evaluate ESG criteria on a scale of 1 to 5.

The success of S&P Global Rating’s ESG rating

Last year S&P Global Ratings’ ESG rating was selected as best ESG assessment tool at the Environmental Finance Awards. Above all, its transparency and the relevance of its assessments made the difference. In particular, the rating agency was recognized for publishing both its analytical approach and key sustainability factors on its website and for its efforts to ensure that its ratings remain up-to-date and in line with industry developments and of companies.

“We are delighted that our efforts have been recognized by Environmental Finance at its prestigious Sustainable Investment Awards. We launched ESG assessment in 2019 as a response to companies’ requests for a forward-looking, qualitative, independent and data-driven assessment of their performance and their readiness for future ESG risks and opportunities. In addition to positive feedback from companies, investors and lenders also appreciate our comprehensive assessment of a company’s ESG performance and strategy,” commented Susan Gray, Global Head of Sustainable Finance Business and Innovation at S&P Global Ratings on that occasion.

The agency uses data from the S&P Global Corporate Sustainability Assessment for its rating process and is supported by the work of analysts from S&P Global Ratings, company management and a member of the board of directors.

As reports, S&P Global Ratings has completed approximately 200 ESG assessmentsrepresenting $4.6 trillion in market capitalization across multiple industries globally.

Skepticism about evaluation parameters

The decision to eliminate numerical evaluations also derives from the feedback obtained in recent months. Last year, S&P Global was the subject of an investigation by Republican attorneys general in several US states, launched by Missouri Attorney General Eric Schmitt and part of a broader anti-ESG campaign, which argued that ratings The company’s ESG, including its ESG credit metrics, were politicizing financial analytics.

Narrowing ratings to a range of 1 to 5 further exposed the rating agency to criticism from politicians and investors.

ESG rating providers have also come under scrutiny from regulators around the world in recent months for the transparency and consistency of their ratings. In June, the European Commission presented a new set of measures to strengthen the European regulatory framework on sustainable finance. The aim is to ensure that the European framework for sustainable finance not only continues to support businesses and the financial sector, but encourages the private sector to finance transitional projects and technologies.

with these standards the Commission proposes new rules that increase the level of transparency of the market for ESG rating agencies.

In addition, last July the UK’s FCA (Financial Conduct Authority) announced the launch of a draft voluntary Code of Conduct for ESG rating and data providers.