Moody’s, Fitch Ratings, S&P Global called out for failing to reflect climate risks, ESG factors in credit ratings
- A study of 721 companies in climate-intensive industries found no direct relationship between ESG scores and credit ratings, research firm says
- The conventional rating methodology requires an overhaul, says the Institute for Energy Economics and Financial Analysis
Rating agencies must overhaul their credit-assessment methods to integrate environmental, social and governance (ESG) factors and better reflect risks from the looming climate crisis, according to a report by the Ohio-based Institute for Energy Economics and Financial Analysis (IEEFA).
While credit-rating companies increasingly view risk through an ESG lens to assess an entity’s creditworthiness, the way they have incorporated ESG factors into credit analysis has had no effect on their conventional credit assessments, according to the report released on Tuesday.
IEEFA’s analysis of 721 companies in the oil and gas, utilities, automotive-manufacturing and coal-mining industries as of September found no direct relationship between the companies’ ESG credit scores and their credit ratings.
“ESG integration is now a critical component of the investment process,” Hazel Ilango, energy finance analyst at the IEEFA, said in the report. “As a result, the conventional rating methodology requires an overhaul to include long-term risk and produce a tangible outcome on credit rating due to ESG factors.
“As ESG factors have grown in importance in financial markets, integrating them in conventional credit-rating assessments is a critical step towards a more sustainable financial system.”
