Ratings and scores have always been controversial. The neat data packages that fit easily in an Excel sheet have become, perhaps, too indispensable, supporting our illusion of being able to make informed and systematic decisions. Some claim that ratings are a gross oversimplification of the messy reality they are supposed to represent; others praise them for being a helpful way of processing complexity without losing track of the big picture. Their merits and limitations have been discussed for decades.
The latest instalment in the debate comes courtesy of the credit ratings arm of S&P. Earlier this month, the venerable agency announced that they would discontinue some of their scores. Don’t panic; the good old S&P credit ratings will survive (what would we do without them?). It is only the alphanumerical ESG credit indicators that will bite the dust.
Introduced just over a year ago, these scores were hailed as the perfect illustration and summary of ESG factors’ impact on creditworthiness. Now, S&P has had a change of heart, deciding 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.” Numbers are out; stories live on.
Despite the clever timing of the announcement, in the middle of the summer holiday season, S&P’s decision to kill its darlings has hardly passed unnoticed. Since the press picked up the news, the agency has had plenty of occasions to reiterate that it “does not affect our ESG principles criteria or our research and commentary on ESG-related topics, including the influence that ESG factors can have on creditworthiness.”
Inevitably, though, it is perceived as an apparent sign of ESG retreat. One plausible explanation is that S&P has finally caved to the immense pressure applied by the notorious Republican Attorneys General of the US. ESG ratings expert Tom Lyon, a professor at the University of Michigan’s business school, calls the decision “just the latest example of a company crumpling in the face of these Republican attacks”. Sasja Beslik is of the same opinion, further questioning the agency’s commitment to sustainability. “The ‘ESG purge’ initiated by schmucks in the USA is welcomed,” reads his sarcastic comment to the news. “It will purge ESG from pretenders, hypocrisy, and players who, in fact, never believed in it. Thank you, De Santis!”
Let’s give S&P the benefit of the doubt, though. Perhaps the decision was merely the product of a serious soul-searching exercise. Maybe they concluded that their ESG ratings were not useful enough to justify the effort of compiling them. The competitors beg to differ, however. Fitch, for one, intends to keep scoring ESG in the belief that “there are profound limits to what text disclosures can do for investors monitoring an entire portfolio of hundreds of serviced issuers and bonds,” comments Richard Hunter, Fitch Ratings’ chief credit officer. His clients seem to appreciate the relevance of a continuous numeric rating system. Moody’s, too, states that they will keep publishing ESG scores on a one to five scale.
There are also those who salute the demise of S&P’s ESG ratings. Some critics believe in earnest that incorporating ESG scores into credit ratings is detrimental to both investors and corporations, misinforming their decisions, as it were. “Wonderful news! ESG scores were always dubious instruments of corporate bullying. RIP,” chirps a happy (anonymous) netizen.
The ‘RIP’ in this comment bothers me. I feel like reminding him/her that in most cultures, it would be considered bad manners to speak ill about the recently deceased. As a sign of respect, let us instead recall the merits of a rating system, by no means perfect, that has nevertheless been instrumental to the work of many investors. Then, once the mourning period is over, let us see exactly what was wrong with it and set about building a better one. After all, ratings themselves aren’t inherently good or bad. Rather, it’s how you construct, communicate, and implement them that determines whether or not they can be used to make decisions fairly and transparently.
