Large credit rating agencies tend to rate more favorably on ESG
Well well well…
Preliminary research has been conducted and shows that ESG rating companies that have been taken over by the large credit rating agencies start to rate the clients of those large rating agencies more favourably. This is precisely the fear that I expressed in my recent book “Sustainability Rating Agencies vs Credit Rating Agencies: The Battle for the Mainstream Investor.” The opportunity for credit rating agencies to install themselves in this new realm of finance and inject their fundamental conflicts is truly great, but so is the threat that this causes. The new streams of finance are vulnerable, and the transplanting of massively impactful conflicts of interests has already begun, clearly.
The article is behind a pay wall, but the essence of the research undertaken by scholars at SMU’s accounting school is that they analysed the ratings given by RobecoSAM and Vigeo Eiris before and after their acquisitions from S&P and Moody’s respectively. Using Refinitiv data as the benchmark, the scholars found that RobecoSAM’s ratings for entities rated by S&P increased by 6.7% after the acquisition, whilst Vigeo Eiris’ ratings for entities rated by Moody’s increased by 4%. The scholars urge caution with these findings as they are still preliminary and being tested against different criteria.
However, this has been in the stars for the ESG space for some time. Allowing for the credit rating agencies to devour the ESG rating space will only lead to one thing: a transplanting of the culture of the credit rating agencies into the ESG space, and all that comes with it. The forthcoming regulatory effort by the EU needs to consider this reality before it codifies anything, if it does.