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How are the traditional ratings services approaching ESG? We asked S&P.

February 28, 2020

As investors seek more ESG data, data providers have developed a range of tools to meet those needs. S&P Global Ratings, a provider of traditional credit ratings, recently developed a separate product called an ESG Evaluation. We spoke with Michael Ferguson from S&P Global, the Americas Team Leader for Sustainable Finance, to learn more about the methodology and analytical approach of the ESG Evaluation.

This is an interview with S&P Global Ratings. NYSE presents the information for informational purposes, but does not endorse, represent nor warrant the accuracy of the narrative, which relies solely on material provided by S&P Global Ratings.

There are various approaches to ESG opinions in the market, what are some of the key elements of this opinion?

First, because we engage directly with the issuer and meet with them in person, we are able to provide an opinion on long-term preparedness, which we think provides valuable insight into the sustainability of a company. Second, while our opinion relies heavily on data collected from public sources, we overlay qualitative judgment; that is, we believe that ESG data points create a foundation but should not be considered in isolation. Third, we include our senior credit analysts in the review and therefore can leverage their credit rating experience and judgment to understand how these data points can become financially material. Finally, this is a cross-sector approach. We seek to ensure comparability of scores across regions, asset classes, and issuer types.

Do you factor in non-public information?

Yes. We start our analysis by capturing information from publicly available sources, like sustainability reports and 10-Ks. But, because we engage with the company, we also receive data that may not be publicly available. Further, we also supplement these data points, which help build a current profile of the company, with a discussion of strategy with the company’s management and board. This discussion may also include non-public information, some of which helps us form an opinion on long-term preparedness.

Talk a little about the process, how do you engage with the company during the evaluation?

We have several touchpoints with the company throughout the process. Our initial analysis will involve collecting data from public sources. Once we have done this, we send this collected data to the company, and explain the use of that information, with the expectation that they will provide additional non-public information. Once the company has returned this data to us, we use our analytic framework (which is published on our website) to form an opinion on their ESG profile – this is not just a quantitative assessment of raw data points, but rather our quantitative and qualitative analysis of those data points, which can be given additional context by the company. Importantly, we arrange an in-person meeting to help assess the company’s level of preparedness. This will generally involve meeting senior management and include the participation of a board member. This meeting will typically involve a discussion of strategy and seek to arrive at an understanding of how the company identifies, measures, and acts on long term risks and opportunities. We also continuously monitor the ESG Evaluation after producing our initial report.

How is the ESG Evaluation different from a traditional S&P credit rating?

The ESG Evaluation is separate and distinct from a credit rating and provides different opinions. Our credit ratings are our opinion of an issuer's ability and willingness to meet its financial obligations in full and on time whereas ESG Evaluations provide greater transparency into all aspects of ESG risks and opportunities. In circumstances where we have both an ESG Evaluation and a credit rating on the same company, both may incorporate the same data provided by the company and involve the work of common analysts who understand the company and industry. While there may be ESG factors considered in a credit rating according to our published criteria, an ESG Evaluation is separate from and not an input into the credit rating.

What is your view on how the role of ESG factors will evolve for asset owners and managers over the next few years?

ESG factors are likely to become more common as tools for decision making by financial stakeholders develop over time. Because of the increased interest by market participants, we expect that companies will continue to disclose more information to the market; however, it is not always evident how material, comparable, or relevant the information that is being provided is. S&P Global Ratings’ ESG Evaluation seeks to provide clarity on this, and demonstrate how a company’s level of preparedness impacts its long-term sustainability.