S&P upping transparency in credit rating agency ESG ‘race to the top’

    S&P Global Ratings is taking steps to clarify how environmental, social and corporate governance (ESG) considerations feed into its credit analysis.

    The credit rating agency is phasing in the incorporation of ESG sections in its corporate rating reports. It started doing so for the oil and gas and utilities sectors and is now rolling this out to all major companies across every sector, and to smaller companies in the sectors most exposed to ESG factors that may be relevant to ratings.

    It expected around 40% of the corporates it rates to be covered by an ESG section by the end of the year, it indicated.

    According to the Principles for Responsible Investment (PRI), credit rating agencies needed to explicitly signpost credit-relevant ESG risks and opportunities in rating reports.

    The PRI has been working with credit rating agencies and investors since 2016 in a bid to improve consideration of ESG factors in credit risk analysis and promote better understanding of the practice.

    The PRI found that some “disconnects” between fixed income investors and credit rating agencies were due to a lack of investor awareness of agencies’ improved ESG-related focus and analytical resources. They could also be misconceptions linked to the two groups’ different objectives, PRI said.

    Michael Wilkins, managing director and head of sustainable finance at S&P Global Ratings, said: “We have long incorporated ESG considerations into our credit analysis. What we aim to do now is to more clearly underline to industry bodies, investors, and stakeholders how we do so.”

    In a report rounding off the first phase of the ESG and credit risk initiative, the PRI said progress had been “remarkable”, especially by the large credit rating agencies.

    Carmen Nuzzo, PRI senior consultant on the initiative, said the largest agencies had “embarked on a race to the top”.

    Last month Fitch launched ESG “relevance scores” to show how ESG factors affected the agency’s individual credit rating decisions.

    Moody’s has also taken steps to be more clear about how it incorporates ESG issues into ratings. In November 2017 it announced it had expanded its ESG-dedicated teams and resources as part of this effort.