S&P Global Ratings has launched a benchmark to evaluate environmental, social and governance factors which it said is the first to include an assessment of future preparedness as well as reviewing current practices.
Yann Le Pallec, head of global ratings services at S&P Global Ratings, said at the launch event for the benchmark that ESG is an essential component of sustainable growth but there is a lack of standardised data and benchmarks.
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“You cannot act on what you cannot measure,” he added. “We are providing new metrics to empower the right decisions. This is a significant step forward to filling the information gap and improving disclosure.”
ESG Evaluation is separate from S&P’s credit ratings and an aggregate of two components - the ESG profile and preparedness.
It draws on the rating agency’s network of credit analysts, and data and information from Trucost, a provider of environmental data risk analytical tools which the ratings agency acquired in 2016, and S&P Global Market Intelligence. In addition the framework includes data from public bodies and non-governmental organizations such as the United Nations Principles for Responsible Investment and the Carbon Disclosure Project.
The evaluation includes a quantitative data-driven assessment of an entity's current ESG performance as well as a qualitative review of how an entity is prepared to mitigate future ESG risks and take advantage of opportunities following discussions with senior management, preferably at board level.
Nigel Topping, chief executive of We Mean Business, a global non-profit coalition that works with businesses to take action on climate change, said at the launch that he was pleased to see a forward-looking assessment as well as a historical ESG profile in the evaluation.
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Topping said: “Investors need good ESG analysis to navigate the fog of change and avoid the obvious icebergs ahead.”
Corinne Bendersky, associate director, sustainable finance at S&P Global Ratings, said at the launch that the profile assesses an entity's current ESG risk exposure using S&P’s new ESG Risk Atlas based on sector and geography.
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Preparedness is a qualitative assessment of an entity’s ability to anticipate and adapt to emerging or long-term ESG risks, but also to harness ESG-related opportunities. The entity receives a final score from 1 to 100 which is comparable globally across sectors.
Joshua Kendall, senior analyst, ESG at Insight Investment said at the launch that the fund manager is seeing increasing evidence that ESG has an impact on a company’s fixed income risk profile, especially in emerging markets.
“Since 2015 there have been 12 defaults in emerging markets of more than $1bn and seven have been due to ESG factors,” Kendall added.
S&P said the the ESG Evaluation is available for entities in the corporate, infrastructure, and selected public finance sectors. In the coming months, Evaluation will be rolled out to banks, asset managers, multilateral institutions, public healthcare, water and sewer entities, and then insurance, social housing, schools and education sectors.
Data barrier
The launch of the S&P’s benchmark comes as the number of investors who said data is the the biggest barrier to integrating ESG has increased in the last two years according to the latest ESG Global Survey from BNP Paribas Securities Services.
Two thirds of investors said data is the biggest barrier, higher than 55% in the 2017 survey.
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Frank Roden, head of asset managers EMEA at BNP Paribas Securities Services said at a media briefing this week that problems cited with data include inconsistent coverage across asset classes, conflicting ESG ratings and indices and the lack of forward looking scenario analysis. He continued that data is evolving quickly as the industry collaborates and regulators look to set standards.
Andreas Feiner, founding partner at asset manager Arabesque, said in the report: “I believe data on sustainability is now viewed in a similar way to how financial data was treated around 75 years ago. This has resulted in a situation where some companies avoid disclosing some information that would potentially show them in a negative light.”
Spending
Consultancy Aite Group has predicted that spending by asset owners and asset manager on ESG-related data will increase to $322m in 2021, compared to $111m in 2015.
Paul Sinthunont, Aite Group
Paul Sinthunont, analyst at Aite Group, said in a report: “This represents a total growth of 291% and a compound annual growth rate of 19.5% over that time period. The growth over the time period reflects the increasing awareness and practice of the various facets of ESG-based investing from ESG integration, corporate engagement, impact investing, and sustainable investing.”
Sinthunont continued that ratings agencies have started to incorporate ESG-related factors into the assessment of a firm. For example in January this year Moody’s released and updated its methodology to assess and incorporate ESG risks and Fitch Ratings also launched a scoring system to show how ESG factors affect the agencies’ rating decisions.
“It is clear that even in the credit rating world, ESG has become an increasingly important component of credit rating scores,” added Sinthunont. “Overall, the credit rating industry is long-established and consolidated, with fairly consistent lenses and broadly similar rating results.”
