One of the largest independent credit agencies in the world will no longer dish out numerical ESG scores in their ratings for corporations, ending a short-lived practice that caused investor confusion and prompted political blowback.
S&P Global Ratings said it will cease giving companies scores on a 1-5 graded scale that it rolled out in 2021 based on the potential financial impact of environmental, social and corporate governance factors.
“S&P Global Ratings remains committed to providing the market with transparency on how and when environmental, social and governance (ESG) factors influence our assessment of creditworthiness,” the company said in a statement. “However, effective immediately, we are no longer publishing new ESG credit indicators in our reports or updating outstanding ESG credit indicators.”
The move marks the latest setback for ESG investing, a hot-button financial strategy that takes into consideration companies’ stances and actions on climate change, social justice politics and diversity.
But S&P Global is far from ditching ESG as an indicator in its overall credit ratings, which affect companies’ access to capital and interest rates.
While it will no longer give alphanumeric ESG scores, the agency made clear that ESG “will remain integral to our reports” and will continue to take such factors into consideration. Rather than assigning a number, S&P said “analytical narrative paragraphs” will be “most effective at providing detail and transparency on ESG credit factors material to our rating analysis.”
The company added, “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.”
S&P Global said ESG credit indicators originally were “intended to illustrate and summarize the relevance of ESG credit factors on our rating analysis” that could supplement narrative paragraphs.
Such numerical scores often created confusion for investors about how they may affect a company’s debt obligations or long-term viability.
They also acted as fuel to the fire for the anti-ESG war waged by Republican officials, who say ESG is woke capitalism promoting left-wing ideologies that jeopardize investment returns and companies’ bottom lines. In particular, conservatives say one of ESG’s underlying objectives is to combat climate change by driving money away from oil and natural gas.
Red states have divested billions of dollars in recent years from pro-ESG investment firms and banks, such as BlackRock, State Street, Vanguard, JPMorgan and Wells Fargo.
Texas last year became the latest state to join an investigation brought by 19 Republican attorneys general, led by Missouri, into S&P Global over its ESG ratings. They alleged the company violated consumer protection laws by injecting politics and opinion into what “should be a purely financial decision.”
“Too many consumers and investors have been hurt by the woke ESG movement’s obsession with radical social change and willingness to ignore the law,” Texas Republican Attorney General Ken Paxton said at the time. “We’re investigating S&P Global to find out if they’ve engaged in the types of destructive, illegal business practices that are so pervasive in the ESG movement. If so, they will have to answer for their actions.”
The coalition of GOP attorneys general also launched an ESG probe last year into financial services firm Morningstar.