Red states cheer as ESG scores get canceled.

Standard & Poor’s Drops ESG Scores from Credit Ratings

Several states are celebrating as Standard & Poor’s (S&P), one of the​ world’s ⁣largest credit‌ rating agencies, announced that it will no longer include environmental, social, and governance (ESG) scores in its credit ratings. This decision ‍comes after a year of states being ⁤subjected to these scores, which measure compliance with progressive criteria such as reducing fossil fuels and supporting equity.

ESG scores have been used by rating ​agencies like S&P, ​Moody’s,⁣ and Morningstar, as well⁤ as⁢ organizations like the Human Rights Campaign, to assess companies’ commitment to environmental and‍ social issues. However, the expansion of ESG scoring to include cities, states, and countries drew backlash from several U.S. states, ⁣including Utah, which demanded an end⁢ to the practice.

Victory for States

Utah state treasurer Marlo Oaks, along with​ other state leaders, ‍sent ⁣a letter to⁢ S&P demanding an end to the inclusion of ESG scores in credit ratings. Now, with S&P’s reversal, Oaks is hopeful for a change in the financial landscape.

S&P clarified ‍that while it will continue to provide information about companies’⁣ ESG practices, it will no longer calculate numerical ESG scores. Instead, ⁤the agency will focus on providing ​detailed⁣ narratives about ESG‌ factors that influence creditworthiness.

Some experts believe that S&P’s retreat from ESG is a‍ response to pressure ⁢from Republican lawmakers. However, critics argue that ESG scores are subjective and politically motivated, with little correlation to a borrower’s actual creditworthiness.

ESG’s Impact on Financial Health

In addition to credit ratings, S&P also launched ​the S&P 500 ESG Index, which measures the performance of securities meeting sustainability criteria. While the ESG index initially outperformed the S&P 500,⁢ its focus on “green” companies ‌led to underperformance when energy companies rebounded.

As the ‌ESG industry faces scrutiny, more companies are distancing ‍themselves from the term. Larry ⁢Fink, CEO of⁣ BlackRock, recently announced that he would no ‌longer⁣ use the ‌term ESG. Now, with‍ S&P dropping ESG scores, it seems that ‍the‌ tide may be turning against this controversial measure of corporate⁣ responsibility.

Debating ESG​ Discrepancies

Credit ratings are meant‍ to assess ⁢a borrower’s ability to ⁣repay debt, but the addition of ESG criteria has‍ raised concerns about ⁢transparency‌ and objectivity. While​ some companies offer ⁢consulting services to⁢ improve ESG scores, others argue that these scores have little to do with⁢ a ⁤borrower’s financial health.

With S&P’s decision to remove ​ESG scores from credit ratings, the future of ESG⁣ as a measure of financial health remains uncertain. As the debate continues, it is clear that the ESG industry ⁣is facing significant challenges and ​may need to redefine its approach.