S&P Global, one of the largest independent credit ratings firms in the world, has discontinued its practice of providing ‘Woke’ ESG ratings for corporate borrowers.
Since 2021, this debt rating agency had rated companies on a scale of one to five based on their environmental, social, and governance risks. As reported by the Financial Times, S&P had given Visa a two for both “E” and “S”, and three for “G”. In contrast, FirstEnergy, an Ohio-based utility company implicated in corruption, got a four for “G”, which is the second-lowest score in S&P’s system.
Recently, S&P shifted its stance, deciding that textual descriptions, rather than scores, would represent their evaluation of a company’s ESG considerations.
“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,” the rating agency said.
This change sets S&P apart from its competitor, Moody’s, which continues to rate ESG using the one-to-five scale.
Given S&P’s significant role in influencing a company’s borrowing rates, their decision has notable implications. Last year, as Republicans began questioning Wall Street’s reliance on ESG, conservative state attorneys general launched an inquiry into S&P’s application of these criteria.
Tom Lyon, a University of Michigan business school professor, remarked that this decision by S&P might be a response to the political pressure. He also noted that the actual reliability of ESG ratings provided by firms like S&P has been a matter of concern.
Skepticism about ESG scores has also emerged among investors. Marcus Moore of Osterweis in San Francisco commented that he doesn’t rely heavily on specific ESG scores when making decisions, emphasizing that they shouldn’t be the main consideration for investors.
S&P clarified that their ESG credit indicators were not a direct reflection of a company’s overall ESG performance but were meant to highlight the impact of ESG factors on their rating analyses. The recent changes, according to S&P, won’t impact their broader stance on ESG.
In August, Florida Gov. Ron DeSantis signaled growing political resistance to the ESG standards and announced that it was eliminating their influence from its state pension fund decisions.
“Corporate power has increasingly been utilized to impose an ideological agenda on the American people through the perversion of financial investment priorities under the euphemistic banners of environmental, social, and corporate governance and diversity, inclusion, and equity,” saidGovernor Ron DeSantis. “With the resolution we passed today, the tax dollars and proxy votes of the people of Florida will no longer be commandeered by Wall Street financial firms and used to implement policies through the board room that Floridians reject at the ballot box. We are reasserting the authority of republican governance over corporate dominance and we are prioritizing the financial security of the people of Florida over whimsical notions of a utopian tomorrow.”
Former President Donald Trump’s Labor Department had place similar restrictions on ESG considerations for workplace retirement plans, which were subsequently overturned by the Biden administration through an executive order on “climate-related financial risk.”
S&P Global Inc., recently ranked by Insider Monkey as one of the top 30 stocks among hedge funds, has delivered a 13.45% return in the past 3 months. Since Tuesday’s market open, SPGI’s stock index climbed 10 points to $390 a share.