ESG No More? – S&P’s Decision on ESG Scores
One of the recent investment trends that took the markets by storm was ESG investing. ESG stands for Environmental, Social, and Governance, and these are factors not related to financials that investors have been incorporating into their analysis to purchase stocks. This socially conscious investment method looks to put money in companies that perform well and improve in these areas, with the belief that great performance in these areas translates to good business growth. The popularity of ESG investing has led to funds investing with those factors in mind, but things might be starting to change.
On Wednesday, S&P Global made the decision to change their policy regarding ESG ratings for companies. Instead of issuing numeric scores from one to five as they have been doing, they are only going to continue providing a detailed paragraph regarding the ESG factors involved with their rating analysis. This is major because S&P Global is the largest provider of these metrics, which means that other large institutions such as Fitch and Moody’s will likely join them in making this decision in the coming months. According to Bloomberg, investor confusion played a role in the removal of the scores, but this has been in the making for a while now. There are many reasons behind the pushback on ESG, the first one being that ratings were not as reflective as they appeared. Many on Wall Street felt that the scores were expected to work similarly to credit ratings, which was never feasible, while also not being reflective enough. The inconsistencies from qualitative, non-financial factors that are interpreted differently from firm to firm, now being turned into a score is leaving some investors skeptical. Additionally, there is backlash from conservative states who are looking to pass legislation against things like ESG investing because of the politicization of the idea, although that did not play into S&P’s decision. There is a place for ESG on Wall Street; it’s a matter of time before we figure out if it can play a major role in investment decisions moving forward.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.