Explaining the ESG divide between the credit ratings agencies
Happy Finance Friday! I’ve covered the public finance ratings agencies for a long time and this week’s newsletter is my take on what’s going on behind the scenes with the agencies’ approach to evaluating Environmental Social & Governance factors. It’s a well-informed opinion based on facts, and one I’ve gut-checked on background with several others in this industry. But nevertheless, please consider that as you read on. And let me know in the comments section what you think.
Taking sides over ESG
A funny thing happened on the way to writing this week’s newsletter for Route Fifty. I’d wrapped up my reporting on the Utah state treasurer’s protest over S&P Global’s new “ESG indicators,” which includes a 1-5 ranking system, when a report from the Kroll Bond Ratings Agency popped up in my inbox. The report was titled “KBRA Has a Clear Focus on Credit Ratings, Not ESG Scores,” and it throws down the gauntlet.
“Rating agencies have rushed to deliver ESG ratings or scores,” the report says. “KBRA has taken a more disciplined approach, providing credit ratings only while striving to become an important source of ESG analysis for the credit markets.”
I included a mention of the Kroll report in my Route Fifty piece, but clearly there was more to the story. And then this week, Fitch Ratings weighed in on the very same topic. Coincidence? Not likely. Fitch dug in on its ESG scoring system and explained that although it is rare, its U.S. public finance ratings are affected by environmental, social and governance considerations in 7% of cases.
For example, the agency recently put the Reedy Creek Improvement District on a negative ratings watch after the Florida legislature passed a politically-motivated law that would dissolve the district. In this case, the factor affecting the credit outlook is governance.
And what about Moody’s Investors Service? It has not chimed in on this latest kerfuffle but it is also squarely in the “scoring ESG” camp. Moody’s releases issuer profile scores (IPS) and credit impact scores (CIS) for the states and large cities and counties.
So what’s going on here? Read on.
ESG is subjective. But that doesn’t make it political.
Most of the political controversy here is around the “E” of ESG. Credit ratings agencies say these factors have always been part of their ratings criteria and that’s pretty obvious with the “G” for governance. And a little apparent with social factors like changing population demographics.
In response to my questions about politics, Utah Treasurer Milo Oaks emailed me last week that, “ESG is political in nature because it is highly subjective and places a value judgment, through a score, on subjective criteria. Evaluators from different organizations using the same matrix often disagree on ESG scores, which can and do change on a whim.”
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