S&P Global Ratings has unexpectedly dropped top-line environmental, social and governance (ESG) gauges from its corporate credit reports less than three years after introducing the method.
In a release last week S&P said it would stop publishing the ESG indicators, expressed in alphanumeric format, “effective immediately”.
According to the statement, S&P introduced the measure in 2021 “to illustrate and summarize the relevance of ESG credit factors on our rating analysis”.
“After further review, 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,” the release says.
But the decision follows a growing political storm in the US about ESG as well as moves there and in Europe to tighten regulations on ratings agencies in the sector.
Offshore press also reported the S&P move was “triggered by expressions of confusion from investors” who use the group’s credit ratings service.
Rival ratings firms Fitch and Moodys continue to offer ESG credit indicators similar to the now-defunct S&P version.
The three top credit rating agencies have all committed to incorporating ESG factors into their corporate credit coverage.
Fixed income is particularly problematic for ESG-inclined investors given it is a “diverse and somewhat fragmented asset class — spanning corporate bonds, sovereign, government-related, and securitized bond issuance”, according to a State Street Global Advisors note published this month.
In addition to data issues – such as poor coverage, limited securities-level information and time-lags – the State Street paper says most ESG benchmarks built for the asset class are based on the same “scoring frameworks and methodologies that are used to create ESG equity indexes”.
“… however there is room for ESG rankings to be more tailored to fixed income,” the note says.
Fixed income funds relying on such indexes to support ESG product claims can face regulatory challenges with Vanguard Australia, for example, stung with a court challenge last month over a bond strategy popular on both sides of the Tasman.
As reported at the time, the Australian Securities and Investments Commission (ASIC) is suing Vanguard over the possibly mis-branded Ethically Conscious Global Aggregate Bond Fund, which was linked to a specialised MSCI index.
Following the Vanguard action, other large investment managers including BlackRock and State Street have been “scrambling to understand whether they could be hit with greenwashing lawsuits”, the Australian Financial Review (AFR) reported last week.
Blake Briggs, head of the Financial Services Council Australia, told the AFR that the Vanguard case involving “widely used global indices” had unsettled the investment industry.
ASIC deputy chair, Sarah Court, said in the article that asset managers needed to understand the machinations of the underlying indexes that back any ESG funds.
“At the very least, we would say that the investment manager needs to take reasonable steps to satisfy itself that the screening tool is being applied to have the outcome that the fund or asset manager is representing,” Court told the AFR.
In a speech last week, the ASIC deputy chair, called out the Vanguard, and an earlier Mercer, case as important landmarks in the regulator’s anti-greenwashing crusade, warning there were “more to come”.
“The proceedings that we have filed against Mercer Superannuation and Vanguard Investments Australia, in very broad terms, allege misrepresentations by those firms in relation to investment exclusions,” she said. “Specifically, we allege that each of those firms promised that they would exclude investments in companies associated with fossil fuels, in circumstances where we say they did not. It is appropriate to recognise that both sets of proceedings are being defended.”