By Tom Ozimek
Rating agency S&P Global has dropped its use of environmental, social, and governance (ESG) scores to assess corporate borrowers amid questions over the usefulness of such metrics and amid broader backlash to “woke” agendas being pushed in board rooms across the United States.
Since 2021, the credit rating agency has rated companies on a scale from 1 (best) to 5 (worst) in each of the three components of ESG. But now, S&P Global’s ESG scoring system is being dropped in the rating agency’s credit quality assessments of publicly rated firms.
“Effective immediately, we are no longer publishing new ESG credit indicators in our reports or updating outstanding ESG credit indicators,” the rating agency announced in a statement obtained by The Epoch Times.
The rating agency hinted that lack of effectiveness was the rationale for dropping the ESG scoring system—which has been the subject of sharp criticism from conservatives who see it as a manifestation of leftist or even neo-Marxist agendas in corporations.
“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, and these will remain integral to our reports,” S&P Global said in the statement.
A Bloomberg report citing a “person close to the process” who declined to be identified indicated that the change was prompted by “expressions of confusion” on the part of investors who rely on the agency’s credit ratings to inform their investment decisions.
A request for clarification from The Epoch Times as to why the ESG scores were being dropped wasn’t returned by press time.
‘Not That Reliable’
Patrick Welch, chief ESG and ratings policy officer at Kroll Bond Rating Agency, told Bloomberg that confusion is the likely chief culprit driving the change at rival S&P Global.
By using a five-point rating scale, “you’re putting one scoring system—an ESG one—inside another scoring system, which is the credit rating,” Mr. Welch told the outlet.
He said some of the confusion is about whether the rating reflects financial risk to the company or the company’s effect on, for example, society and the environment.
Tom Lyon, a professor at the University of Michigan’s business school who has studied ESG ratings, told the Financial Times that ESG ratings are “not that reliable, and they disagree.”
Mr. Lyon noted that ESG ratings have been under attack by conservatives and congressional Republicans while suggesting that S&P Global folded in the face of pressure to stop using them.
While S&P Global has dropped its ESG scores, its rivals Moody’s and Fitch continue to use an alphanumeric scale for their ESG assessments.
Richard Hunter, chief credit officer at Fitch Ratings, told Pensions & Investments, “Fitch believes that there are profound limits to what text disclosures can do for investors monitoring an entire portfolio of hundreds of serviced issuers and bonds.
“We have found that having a numeric score that crisply identifies individual issuers with actual rating changes that can be classified as driven by a factor which has a direct relevance for ESG as well, or where those factors are heavily discussed at the committee, without rising yet to an actual rating change, has been highly valued by users.”
‘Obsession With Radical Social Change’
S&P Global, which is one of the world’s largest raters of corporate debt, faced calls for an investigation last year by a coalition of Republican attorneys general.
“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 Attorney General Ken Paxton said in a statement in September 2022.
“We’re investigating S&P Global to find out whether 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.”
While that investigation has yet to conclude, other experts say the pushback against ESG isn’t confined to conservatives.
Scott Shepard, a fellow at the National Center for Public Policy Research, which is a free-market public policy research group, told The Epoch Times in a recent interview that opposition to ESG is gaining steam in the United States.
“We’re seeing something very different this time. Because it’s not just the conservatives, who are always interested in this sort of thing; it’s the whole country,” Mr. Shepard said of boycott calls facing brands such as Bud Light and Target over their embrace of left-wing principles.
ESG, which started as guidelines, has now turned into heavy-handed mandates on controversial “social justice” ideologies, he said.
Mr. Shepard noted that ESG initiatives could expose businesses to legal action if they can be shown to be a breach of fiduciary responsibility to shareholders.
Will Hild, executive director of Consumer’s Research, a nonprofit consumer protection group, told The Epoch Times during a recent interview that woke business practices aren’t going away without a fight.
Corporate leaders fear losing their jobs if they drop ESG more than they fear corporate losses, Mr. Hild said. That’s why woke companies don’t seem to learn their lesson and keep pushing ESG’s “far-left agenda,” he said.
“It’s a cover for pushing politics using other people’s money,” Mr. Hild said.
Darlene McCormick Sanchez contributed to this report.