Wide-angle lens:
Credit ratings agencies dominated the ESG ratings world in 2019, snapping up smaller specialists and unveiling new products. For accelerating the push to standardise disparate ESG information, identify risk, and ultimately link it to the cost of debt, S&P Global Ratings is IFR’s ESG Opinion Provider of the Year.
It was a milestone year for S&P Global Ratings, with 2019 ending with its acquisition of the ESG ratings business from award-winning ESG specialist RobecoSAM, which publishes the SAM Corporate Sustainability Assessment, one of the most advanced ESG scoring methodologies.
ESG information is an increasingly valuable commodity as the regulatory framework pulls together to tackle the accelerating effects of climate change. The acquisition further highlighted S&P’s profile in the space following the launch of its ESG Evaluation product in April, after three years of work.
"Through this acquisition, S&P Global is bringing an additional layer of critical insight to our leading suite of ESG product offerings, which will further enable our customers to create resilient strategies, build a sustainable future, and meet the expectations of an evolving market," said S&P CEO Douglas Peterson.
The product complements existing work by S&P’s credit analysts and provides in-depth analysis of companies’ ability to continue operating successfully and their level of preparation for risks that could hit stakeholders or have a significant financial impact.
ESG Evaluation consists of an ESG Profile, which looks at companies’ exposure to “E”, “S” and “G” risks and opportunities, and a forward-looking opinion on companies’ ESG preparedness, or their ability to adapt to potential long-term disruptions. It includes 12 factors and the E, S and G are weighted 30%, 30% and 40%, respectively.
It is solicited by companies that are typically, although not necessarily, companies that S&P already rates. Spanish telecoms operator Masmovil, the winner of IFR’s green loan award for issuing the first leveraged loan linked to ESG and sustainability targets, was one of the first to complete an ESG Evaluation.
Masmovil received a blended score of 67/100 in July and an in-depth report linking pricing on €250m of undrawn loans to the score. Pricing will rise by 15bp if the score falls, and fall by the same amount if it improves.
“The interesting development is that it’s being used to link the pricing of loan margins and it will presumably be used for adjustments to coupons for bonds. That is the way that these scores will mean something, evolve and be mainstreamed into the capital markets,” said Michael Wilkins, managing director at S&P.
This connection between pricing and ESG is due to the depth of the forward-looking analysis, which takes between six weeks and three months to prepare. It includes a two-way diagnostic survey, insight from sector and regional credit analysts, S&P and Trucost’s data including the ESG Risk Atlas, external assessments from institutions like the World Bank, as well as meetings with senior management and discussions with board members.
The dialogue with companies’ management and board members, is a distinguishing factor from ESG specialists, which derive data from public sources. The ESG Evaluations are also dynamic and updated annually and on merit for significant events, rather than being a snapshot in time.
“We feel that the strength of S&P’s evaluation lies in the depth of its analysis,” said Gerard Kits, assistant treasurer of European electricity transmission company TenneT.
The RobecoSAM acquisition caps 20 years of S&P’s work in the field. The two companies have partnered since 1999 when RobecoSAM started to publish the globally recognised Dow Jones Sustainability Indices with S&P Dow Jones.
In 2016, S&P bought Trucost, to strengthen the data used in ESG assessments and ratings and help with the FSB’s Task Force on Climate-Related Financial Disclosures data and carbon analysis, as credit agencies signed up to the Principles of Responsible Investment.
A year later, the firm launched its Green Evaluation product, a second-party opinion for green bonds that gives a “green score” on the environmental contribution of companies’ financing. Nearly 60 have been completed to date, relating to US$40bn of debt.
Several other products have been introduced in 2019, including the S&P 500 ESG index, an expanded suite of Trucost analytics, and new distribution options, as well as new modules added to the Green Evaluation tool.
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