Two rating firms are taking action to offer improved measurements on how companies are living up to environmental, social and governance initiatives. On the credit side, S&P Global Ratings is launching ESG sections in its Corporate Credit Rating reports. On the stock side, Morningstar is launching a Low Carbon Risk Index family, which will move beyond carbon footprinting and evaluate a company’s positioning in the future using ESG factors.
S&P’s announcement coincides with a UN Principles for Responsible Investment report that recommends credit rating agencies “signpoint” credit-relevant ESG risks and opportunities in the ratings report.
Therefore, S&P is phasing ESG sections into its corporate ratings reports. It began with the highest risk sectors: oil & gas and utilities, and plans to add the section “across all major companies across every sector, and to smaller companies in the sectors most exposed to ESG factors, which may be relevant to ratings,” the company stated in a release. It hopes to have this cover 50% of S&P’s rated corporate universe in 2019.
“The fixed income market’s heightened focus on ESG has only emerged recently,” said Michael Wilkins, managing director and head of sustainable finance for S&P Global Ratings, in a statement. “We have long incorporated ESG considerations into our credit analysis. What we aim to do now is to more clearly underline to industry bodies, investors and stakeholders how we do so.”
In 2018, S&P Global Rating completed at two-year lookback series and identified historical patterns for ESG risks, as well as factors that directly or indirectly impacted a rating between 2015 and 2018. It found that there were 372 instances where ESG factors impacted ratings.
Morningstar indexes
Adding to its carbon footprinting measurement, Morningstar this week launched a new Low Carbon Risk Index Family, a group of indexes that will provide “diversified exposure to equities across regions and emphasizes companies aligned with the transition to a low-carbon economy.”
Partnered again with Sustainalytics and using its Carbon Risk Ratings, the indexes will target low portfolio-level carbon risk and fossil fuel exposure.