Sustainability Rating Agencies vs Credit Rating Agencies by Daniel Cash

Author:Daniel Cash
Language: eng
Format: epub
ISBN: 9783030716936
Publisher: Springer International Publishing

The latest approach of the PRI was to put together ‘roundtables’ of credit rating agency representatives and signatory investor representatives, to move the conversation towards potential solutions. From these roundtable sessions, there were a number of instances of the two parties continuing to advance their position, although there was more compromise displayed by both sides. The biggest issue that the credit rating agencies, and the PRI wanted to make clear was that ‘incorporating ESG consideration in credit risk analysis should not be confused with investment strategies that target social or environmental returns in addition to a financial return’. This is symbolic of the jostling for position within the initiative, in that the credit rating agencies consistently attempted, with high levels of success, to define the parameters for what ESG consideration means in practice; it is in their interests to clearly define the restrictions to the concept, in order to limit their exposure to the claim that they are not adequately recognising ESG in their ‘opinions’.

Other key outcomes of the roundtables were that the sentiment of ESG just being utilised to identify and price risks had evolved to the understanding that it could help in generating alpha. This frames the conversation very differently and impressed upon all parties that there is a further incentive to engaging in such investment strategies. The credit rating agencies made clear that one of the biggest hurdles they face is to develop a more quantitative, and therefore comparable, ESG framework with which they could develop their rating actions. This understanding was widely shared as the lack of standards and definitions for what ESG-based investing actually constitutes continues to frustrate. In a connected issue, it was also highlighted that there is no accepted method for verifying the impact of ESG-related information.

The report concluded by, in my opinion, placing the responsibility at the feet of the investors. It was made abundantly clear that investors had not been engaging with the informational materials the CRAs had been producing, and those non-US signatories had not heard of sectoral developments, like that of the work of the Sustainability Accounting Standards Board (SASB).

The final report, entitled From Disconnects to Action Areas, attempts to develop clear pathways for development in this area. Underneath the content of the report, there is a further developed compromise on display, although the investor body has fought back somewhat against the position of the rating agencies. The investors call for more work to be done by credit rating agencies in terms of making clear their views on the materiality of ESG aspects, with one example request being that colour coding, or heatmapping, could facilitate the effective dissemination of the credit rating agencies’ understandings of ESG impact.45 This should be aligned to a more sophisticated backtesting approach from the credit rating agencies in the opinion of the investors, because whilst they acknowledge that it is not always possible to efficiently backtest historically with regard to ESG impacts, etc., any trends may be appropriate for the future creditworthiness of the

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