S&P Global will no longer give scores to corporate borrowers on ESG factors, amid criticism from political groups and questions about their usefulness.

Since 2021 the debt rating agency has used a scoring system of one to five to denote a company's ESG-related risk. Five is the lowest grade exposure, one is the highest.

However, last week S&P changed tack. In a statement on Friday (4 August), it said that it will offer ESG analysis in text only, not numbered scores, "effective immediately", reports Investment Week.

The rating agency said: "We have determined 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."

S&P's reversal sets it apart from Moody's, one of its main debt rating rivals, which also rates ESG factors using a one to five scale. Debt ratings can raise or lower a company's borrowing costs, making them an influential measure.

ESG ratings specifically are facing particular criticism from Republicans in the US, who believe ESG factors are a backdoor for liberal values. Conservative state attorneys-general last year opened an investigation into S&P's use of ESG criteria.

Tom Lyon, a professor at University of Michigan's business school who has studied ESG ratings, told the FT that S&P's move was "just the latest example of a company crumpling in the face of these Republican attacks".

Their attacks have also overshadowed real concerns about ESG ratings sold by S&P and other financial firms, Lyon said. "They are not that reliable and they disagree."

In its statement, S&P said its ESG credit indicators were not sustainability ratings or a standalone assessment of a company's ESG performance.

"The ESG credit indicators were intended to illustrate and summarise the relevance of ESG credit factors on our rating analysis," it said. 

"This update 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."

 

This article was first published on Investment Week.