Reports of Credit Rating Agencies Moving into the ESG Marketplace

Earlier this month, the Financial Times reported that the Big Three credit rating agencies were continuing to make their move into the ESG marketplace via a number of concerted deals. This report falls directly in line with the analysis I developed in my recent book The Role of Credit Rating Agencies in Responsible Finance and in an article last year entitled Sustainable Finance Ratings as the Latest Symptom of “Rating Addiction”. As I will be producing a chapter for a book next year, with that chapter being entitled Sustainable Rating Agencies, it seems prudent to review the market and its developments.

The FT begins by noting that Moody’s has been making particular waves in the marketplace, as they purchased a majority stake in Vigeo Eiris earlier this year, and followed this with the purchasing of Four Twenty Seven. In June, S&P published its first ESG evaluation – of the company NextEra Energy. The article goes on to discuss how experts believe the market for sustainable-based ratings will grow from $200 to $500 million in the next few years, with one onlooker stating that the two agencies ‘know this will be a big market in the future and it will only grow’. The article makes the accurate connection between the growth of the marketplace, the attention of the rating agencies, and regulatory designs which are pushing for increased sustainability disclosures. This policy will, naturally, increase the need for the verification and categorisation of this increased data. It should also have the theoretical effect of making ESG-based ratings much more accurate, as disclosure increases.

However, that is only theoretical. The article discusses how research has shown that the agencies, whilst focusing more on ESG, are not disclosing their methodologies and, as a result, ‘ESG ratings from different sources are aligned in about 6 out of 10 cases, whereas regular ratings for creditworthiness match 99% of the time’. Whilst we may not want conformity in this particular instance, a divergence of 40% seems to be too large for investors to incorporate and understand. There are attempts to resolve this issue – standards boards are aiming at creating a single rating spectrum – but the accepted understanding is that this is some way off, if at all.

In my book I raised the issue of the credit rating agencies moving into the marketplace in such a concerted way, that there was bound to be problems. This report suggests that such a conclusion may well be accurate. If the Top Two, in particular, continue at the pace they are setting, then they will devour the market for ESG/sustainable ratings. If they do, then investors will be left with just two choices. Perhaps some investors may suggest this is preferable, given the massive divergence that exists currently within the ratings sphere regarding ESG/sustainability. However, there is then scope for the engrained conflicts of interest within the credit rating model to affect the sustainable finance field. If the sustainable finance field is, as some would suggest, the best response to the Crisis-era, then exposing that to the engrained conflicts of interests within the credit rating industry may not be so preferable. It is worth continuing to monitor this market, if only to confirm the hypotheses that the oligopolistic credit rating industry is on its way to devouring the ESG/sustainable ratings field.


Keywords – credit rating agencies, business, ESG, sustainable finance, @finregmatters

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