A study of more than 700 firms has found “no direct relationship” between ESG credit scores and credit ratings, due to ratings providers still “evaluating companies the traditional way”. The report, published by the Institute for Energy Economics and Financial Analysis (IEEFA), acknowledged that the three agencies examined — S&P Global Ratings, Moody’s Investors Service and Fitch Ratings — are “increasingly viewing risk through an ESG lens” to assess an entity’s creditworthiness, including through their development of ESG credit scores. But the IEEFA said it was difficult to establish a “straightforward link” between ESG scores and credit ratings, demonstrating the need for a more direct integration of ESG factors in their rating methodologies. “A company can have a weak ESG credit score, be carbon intensive or lack a clear carbon transition pathway, and yet be assigned a high investment-grade rating due to its high ability to repay its debt in the next three to five years,” said Hazel Ilango, Energy Finance Analyst. IEEFA said the current methodology of ratings agencies does not encourage debt financing of sustainable initiatives, leaving bondholders to support businesses that with “fundamentally poor green standards”. “If the credit framework remains ‘business as usual’, real-world problems such as climate change and social inequality will continue,” it said.
— IEEFA_AsiaPacific (@IEEFA_AsiaPac) March 14, 2023