“The sustainability referees” – the latest on ESG ratings

December 20 2019

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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“Did you know you have a poor ESG rating?” wouldn’t have prompted a response from most corporate treasurers a few years back. Yet the times they are a-changing. With sustainability data getting immersed into global capital markets, the interest in ESG rating management and communication has built momentum. This is why I want to share with you the key trends we’re observing in this area.

ESG ratings become the new corporate business card – and hiding is not an option

Information about ESG ratings was traditionally reserved for licence holders, the investors. However, they’re starting to creep up in public reports to provide independent attestation to the company’s sustainability journey. This could be generic investor presentations or green bond-specific materials. The latter helps highlight that the issuer overall has a credible sustainability narrative and not just a subset of attractive assets.

On the flipside, this means there’s less and less hiding for those companies that are not quite up there yet with ESG top performers. Stakeholders can conveniently research ESG ratings via third party data providers or in some cases directly from ESG rating websites – MSCI for example recently publicised the ratings of 2,800 firms.

ESG ratings’ halo effect strengthens issuers’ narrative

With ESG ratings becoming more material to investment decisions, we’re starting to see them appear within the legal documentation of debt securities, most notably in sustainability performance instruments (typically Revolving Credit Facilities), where they can be the basis of a pricing adjustment (in the commitment fee and margin).

Furthermore with ESG ratings now contributing an important part to an issuer’s overall narrative, we have seen companies incorporate them into the terms and conditions of all of debt offerings (as recently seen with transaction from Deutsche Bahn and BNG). This is similar to the asset selection approach we’ve taken with our NWM ESG Product Framework.

ESG ratings’ ‘wild’ growth in need of a trim

Faced with 100+ parties producing ESG ratings based on different methodologies and a low correlation between those methodologies (only approximately 0.3 between MSCI and Sustainalytics’s ESG ratings methodologies) making it difficult to compare ratings, market participants have lately started to call for methodologies to be consolidated and standards harmonised.

Suggestions include voluntary initiatives, such as organising consultation rounds to clarify the different approaches and agree on methodological changes as well as – as a minimum – provide guidance to corporates on what could lead to rating upgrades or downgrades in the different methodologies. Other market participants would like full-blown regulation of ESG rating agencies.

ESG ratings ‘gobbled up’ in holistic credit ratings

Finally, some market observers predict that ESG ratings per se will only have a short shelf life and that they could eventually become ’gobbled up’ by the major credit rating agencies in order to create more holistic credit ratings - incorporating financial, environmental and social ratios. Moody’s recent announcement around Exxon Mobil is one example of how this could play out.


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