Investors turn to qualitative ESG evaluations

S&P Global ratings was awarded ESG assessment tool of the year for ratings in the 2022 Environmental Finance Sustainable Investment Awards. Susan Gray, global head of sustainable finance business and innovation, tells us how its ESG approach builds on the success of its credit ratings.

Environmental Finance: What led you to develop ESG ratings and how has your approach changed?

Susan GraySusan Gray, global head of sustainable finance business and innovation: We launched the ESG Evaluation in 2019 and designed it to deliver a forward-looking view that sets a new holistic benchmark in sustainability. Companies who were working on ESG were looking for analysis that captured how ESG and business strategy are aligned, they were looking for a forward looking, qualitative, independent and data- driven assessment of their performance and preparedness for future ESG risks and opportunities.

Investors were also looking for this deep dive on the company to help them position their portfolios better and understand the materiality of ESG issues and companies' transition journey.

Our ESG Evaluations help companies, public and private, corporates and financials, cut through the noise, articulate their narratives, differentiate themselves and address investor questions in a more efficient way.

Aside of ESG Evaluations, we also provide sustainable financing opinions, including our soon to be launched EU Taxonomy alignment opinions. They help companies provide investors with greater insight into how their investments will impact and align with ESG goals.

How are your ratings created?

There are two elements to our evaluation. The ESG profiles look at what a company has done over the last few years and what it plans to do in the future. This is then assessed relative to its peers using high quality data and benchmarking we get from S&P Global Sustainable1 including Trucost.

The second is the preparedness analysis where we look at how well-positioned a company is to manage ESG risks and opportunities in the future.

We have over 60 sustainability analysts, working alongside our 1,600 credit ratings analysts, to review this data, speak to the company management and a board member about how the company is engaging with ESG issues. Reported data alone doesn't give a full picture of what a company is looking to do. Our approach is not only quantitative, data-driven and focused on the material issues relevant to the companies' sectoral and regional footprint, but crucially qualitative. We leverage our engagement and analytical understanding to do our analysis and this is increasingly what investors want to see.

We adopted the ethos of our credit ratings to make the ESG Evaluation globally and cross-sectorally comparable. Just as credit ratings are forward-looking, the ESG Evaluation is grounded is the same analytical heritage, with the tools, rigour, independence of providing insights and transparency on a forward-looking basis.

How are the respective environmental, social and governance aspects weighted in your ratings and is there potential for these to become separate ratings?

Our published methodology details the weightings as 30% for both environmental and social issues and 40% on governance.

The ESG Evaluation already provides component scores. It's a level of granularity that allows us to highlight the risks, materiality, and issues that investors care about. We think investors are flooded by information and we want to help them make sense of this without spending their lives reading documents. We think investors value our clear, concise and thoughtful analytical opinions.

Where do you see the ESG evaluation space going? What are the biggest challenges and opportunities for a ratings provider?

It's becoming imperative for companies to be able to articulate their ESG strategy and actions, and it is just as important for investors to understand how well a company is prepared for future risks and opportunities to support for their own decision-making.

With more focus on ESG, the quality of what's being done will be much more important. The biggest opportunity is to be able to provide a comprehensive and thoughtful opinion that's consistently applied around the world and based on high-quality data, engagement with companies and deep analytical expertise.

How do you feel about winning this award and being recognised for your ESG work?

We are delighted that Environmental Finance Awards judges recognized our ESG Evaluation. We offer a very differentiated opinion that is grounded in deep understanding of different sectors, regions, and the key issues that companies are facing and providing the informed and independent insights that investors need to understand in this complex investment environment.