Credit rating agencies battle for ESG supremacy

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A wave of deals has begun among companies that provide companies with environmental, social and governance ratings, fueled by growing demand for data among investors and regulators.

The sector has traditionally been dominated by index providers such as MSCI and a handful of specialist companies, such as Sustainalytics. Today, Moody’s and S&P Global, two of the big three credit rating agencies, are forging their way, offering separate ESG scores for companies in addition to their traditional credit ratings.

Moody’s caused a stir earlier this year by buying a majority stake in Vigeo Eiris, one of Europe’s leading ESG research companies, whose roots date back to the start of the socially responsible investment movement in the early 1980s. Moody’s also later bought Four Twenty Seven, a climate research specialist named after one of California’s emissions targets – 427 million tons of carbon.

S&P has a long history of partnering with RobecoSAM, an asset manager specializing in sustainability research, to create the Dow Jones Sustainability Index, but it is now establishing its own ESG rating business. The New York-based company released its first ESG assessment in June.

Craig Huber of Huber Research Partners, an equity analyst who covers MSCI, estimates the global ESG ratings market is currently worth around $200 million and says it could grow to $500 million within five years.

Last year, MSCI’s ESG research division reported a 30% increase in revenue to $71 million and maintained a similar pace of expansion this year.

Moody’s and S&P “know this is going to be a big market going forward and it’s only going to grow,” said Florian Berg, postdoctoral research associate at MIT Sloan School of Management.

ESG ratings have gained popularity with investors who have started to focus more on sustainability issues. The European Parliament and EU member states agreed new sustainability disclosure rules in March. The regulations are likely to force the hand of investors who to date have avoided ESG disclosures, said Remy Briand, head of ESG at MSCI.

“In one form or another, essentially, we think investors will have to account for climate risk,” he said. The company last week bought a climate research firm called Carbon Delta to expand its ratings business, Briand added.

The third of the big three credit rating agencies, Fitch, has so far stayed out of the ESG ratings market, but is also working to highlight how it uses ESG to determine corporate creditworthiness. . Incidents such as the bankruptcy of California utility Pacific Gas & Electric, which was held liable for billions of dollars in damage caused by wildfires, show how ESG factors such as climate change can create significant financial risks.

“PG&E made everyone wake up and say this is for real and it’s not going away,” said Christina Wong, director of Sustainability, a research consultancy.

In regular credit ratings, companies are only rated on ESG risks that have a direct impact on their ability to repay their debts. “ESG factors may or may not be material. If they are, we will write about them. Otherwise, we’re not going to talk about it,” said Susan Gray, global head of corporate ratings at S&P.

For separate ESG ratings, the analysis goes further. “The purpose of ESG ratings is to examine the sustainability of the issuer’s business model,” said Myriam Durand, global head of ratings at Moody’s. However, what this means varies from agency to agency.

This lack of standardization can be confusing for companies, whose ESG scores often don’t match across agencies. Research conducted by Mr. Berg shows that ESG ratings from different sources are aligned about 6 out of 10 cases, while regular credit ratings match 99% of the time.

Industry bodies such as the San Francisco-based Sustainable Accounting Standards Board are trying to address this issue, but industry experts believe a single rating spectrum is still a long way off.

“I don’t think there will ever be a single note,” Ms Wong said. “I think it’s like sales research. . . You’ll never have an analyst who knows every market and every company.”

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