S&P Global, a leading financial services company, has recently announced a major change in its assessment methods for environmental, social, and governance (ESG) risks. The firm will no longer use numerical ESG scores to evaluate a company’s exposure to these risks. Instead, they will now rely on analytical narrative paragraphs in their credit rating reports.
This decision comes after increasing questions and criticism about the utility of ESG scores and growing political pressure against the use of these metrics. Previously, S&P used scores ranging from one to five to determine a company’s ESG exposure. However, concerns about the reliability and consistency of these ratings led to the need for a change.
One significant factor in this shift is the potential impact on a company’s borrowing cost. S&P Global’s ratings hold weight and can influence the cost of a company’s borrowing. By eliminating numerical ESG scores, S&P is acknowledging the need for a more comprehensive and nuanced approach to assessing ESG risks.
The controversy surrounding ESG scores was amplified when conservative state attorneys-general launched an investigation into S&P’s use of these ratings last year. This investigation further highlighted the ongoing debates and discussions surrounding the credibility and effectiveness of ESG scores.
While some experts have expressed concerns about the reliability of ESG ratings from S&P and other financial firms, others support S&P’s decision. They argue that measuring ESG risks is a complex task and that the concept has been overrated. Portfolio managers and analysts are voicing their support for this update, emphasizing the challenges of accurately measuring ESG factors.
S&P Global has clarified that this change does not affect its ESG principles criteria or its research and commentary on ESG-related topics. The firm remains committed to providing valuable insights and guidance on ESG matters, despite retiring the numerical ESG credit indicators.
The retirement of these numerical ESG credit indicators is expected to spark further debate and discussion about the use and effectiveness of ESG scores in the financial industry. This move by S&P Global underscores the increasing need for more nuanced and comprehensive methods of evaluating companies’ exposure to environmental, social, and governance risks.
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