S&P Global, the well-known ratings agency, has made a significant shift in its assessment of credit quality by discontinuing the use of alphanumeric ESG scores. This decision comes amidst a growing backlash against environmental, social, and governance (ESG) investing.

In a statement issued on Friday, S&P Global announced that it would no longer release new ESG credit "indicators" or update existing ones. Instead, the firm believes that the narrative paragraphs in its credit rating reports are more effective in explaining the impact of ESG factors on credit analysis.

Since 2021, S&P has been using alphanumeric ESG credit indicators. However, it is important to note that these indicators do not represent sustainability ratings or an assessment of an entity's ESG performance. Rather, they serve as a tool to illustrate and summarize the relevance of ESG credit factors in S&P's rating analysis.

Despite discontinuing these indicators, S&P Global Ratings remains committed to maintaining transparency regarding the influence of ESG factors on their assessment of creditworthiness, as stated in their official statement.

ESG investing has faced increasing scrutiny over the past year, with conservative lawmakers and attorneys general claiming that non-financial considerations such as environmental and social issues can negatively impact investor returns.

In fact, earlier this year, Florida Governor Ron DeSantis signed a bill into law that limits the consideration of ESG factors in various investing contexts. The law specifically prohibits state and local entities from entering into contracts with rating agencies whose ESG scores could potentially have a detrimental effect on the issuer's bond ratings.

Andrew Poreda, a senior ESG research analyst at Sage Advisory, believes that S&P's decision to discontinue ESG credit indicators may be politically motivated. If S&P truly believed that these scores were not beneficial, they would have ceased their other ESG rating offerings as well, as stated in an email response.

In conclusion, S&P Global's shift away from alphanumeric ESG credit scores demonstrates their commitment to adapting their credit analysis methodology in response to the evolving landscape of ESG investing. By emphasizing the importance of narrative explanations in credit rating reports, S&P aims to provide a more comprehensive understanding of how ESG factors influence their assessment of creditworthiness.

ESG Credit Indicators: A Shift in the Market

In a recent development, S&P Global has made the decision to discontinue the publication of ESG credit indicators. While some suspect political influences, the company maintains that this move is purely an independent and analytical decision.

Despite this change, S&P Global's subsidiary, Sustainable1, will continue to offer its ESG Rating product. This ensures that clients still have access to valuable ESG information.

It's worth noting that other credit ratings firms may also face similar pressures. However, Fitch Ratings is standing firm on its commitment to include ESG scores in its credit ratings. According to Richard Hunter, Fitch's Chief Credit Officer, this numeric score effectively captures rating changes influenced by specific factors.

Fitch believes that relying solely on textual disclosures is insufficient for investors who monitor a large portfolio of issuers and bonds. They consider a numeric score to be a more practical solution.

Addressing the impact of Florida's anti-ESG bill, a Fitch spokesperson clarifies that ESG Relevance Scores that they assign are not meant to radically alter their rating methodology. Instead, they serve as observations based on existing criteria.

Moody's Investors Service takes a similar approach. The firm incorporates all risks, including those related to ESG, into their credit ratings whenever they are considered material. Additionally, Moody's publishes ESG scores on a one to five scale.

DBRS Morningstar asserts its commitment to continue evaluating and incorporating ESG risks into their credit ratings assessments. Unfortunately, MSCI, another major provider of financial indexes and ESG ratings, did not provide comment on this matter.

Overall, the discontinuation of S&P Global's ESG credit indicators marks a significant shift in the market. While some firms remain steadfast in their inclusion of ESG scores, the future of such metrics in credit ratings remains uncertain.