Credit Rating Agencies and ESG Ratings: Update

Today’s post is just a small update regarding developments in the sustainability/ESG rating market. We have looked at this growing field before here in Financial Regulation Matters. One of the topics of interest is the movements that the established ‘Big Two’ credit rating agencies – S&P and Moody’s – are making into the market, which experts believe will be worth more than $200 million in annual sales this year and could grow to more than $500 million in the next five years.

In the last post, dated the 24th September, we looked how Moody’s had acquired Video Eiris and Four Twenty Seven as part of their own M&A strategy, whilst S&P had published its own ESG evaluation this year. S&P’s developments come off the back of a number of mergers, with one headline merger including that of TruCost. However, S&P continued that drive over the last few days with the announcement that they were purchasing the ESG-rating arm of RobecoSAM. The terms of the deal have not been disclosed and it is thought that the deal will be concluded during the first quarter of 2020. As part of the acquisition, S&P will not only acquire the annual survey that the arm generates – the survey is considered to be one of the leading informational sources regarding companies’ corporate sustainability practices, researching over 5000 companies – but they will also acquire the service that allows companies to purchase one-off reports on their sustainability performance and how that compares to their peers. Also, as part of the deal, RobecoSAM will continue to have access to the data for use in its investment strategies and advice on its survey methodology.

Doug Peterson, the Global President and CEO of S&P, said that the deal is an ‘exciting next step in the evolution of our partnership that will allow S&P Global to create market differentiating ESG products and deliver new content and capabilities to our customers’. This is important for the agency’s objectives because, as we discussed in the previous post and as is clearly understood by the agencies, Peterson confirmed ‘we identified ESG as one of the highest growth areas’. To be able to diversify their product range and, more importantly, the impact of those products on the investment successes of their clients, will be vital for S&P as it seeks to consolidate its position alongside the equally-developing Moody’s Corporation.

However, as I warned in my book The Role of Credit Rating Agencies in Responsible Finance last year, it is very important to monitor this consistent growth. As the development of the field is a social good, there may be a tendency to push for as much involvement by all of the large financial players, in order to grow the field as much as possible. But, we must remember that the push for better and increased rates of home ownership in the US predicated one of the largest crises on record, so we must be careful not to make the same mistake again. I have argued that it is the commodification of ESG ratings that may be problematic, in terms of either those ratings being linked to capital stress tests and the equivalent (to oversimplify a very complicated issue across sectors), or with the development of green finance-related financial products. The rating agencies will, if that market continues to grow, become a key gatekeeper in that particular marketplace which will, in theory, bring a number of inherent conflicts of interest to the surface once more. Time will tell of course of how this will all develop, but the signs are there that this market will just keep growing and growing. Expect more M&A news from the agencies very soon.


Keywords – Credit rating agencies, S&P, ESG, Sustainability, @finregmatters

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