To Rate, or Not To Rate: CCRO Webinar #2 - ESG Ratings
As many high school English students learn, the quote "To be, or not to be" is the opening phrase of William Shakespeare's play Hamlet, Act 3, Scene 1. In his soliloquy, Hamlet famously weighs the pain and unfairness of life against the alternative.
While nowhere near as dramatic (or famous), this blog poses the question “To Rate, or Not To Rate?” This is a timely question for CCRO members to ask following the second of five webinars held on July 19, 2023. This latest webinar was entitled “ESG Ratings: Methodologies & Impacts,” and tackled several pressing questions related to the Energy Transition and ESG ratings.
The topic is also being hotly debated within political and industry circles. For example, on March 14, 2023, the Institute for Energy Economics and Financial Analysis published an article entitled, “ESG scrutiny reveals cracks in credit rating methods.” One conclusion the authors state is that “As things stand, bond investors cannot adequately assess an issuer’s long-term credit risk based on the credit rating alone. They also have to refer to the ESG credit scores to somehow gauge its ESG exposure.”
Participating in the CCRO webinar were Steven Estes (KPMG), Swami Venkataraman (Moody’s), Paul Atkinson (S&P Sustainable 1), and Bill Quadrini (S&P Global Market Intelligence). The session was moderated by Nithya Venkatesan (Navitas Assurance Partners).
Leading up to the webinar, a representative sample of CCRO members shared their thoughts on the following three key questions:
Whether their companies were modifying ERM/risk frameworks to incorporate ESG and energy transition risk (44% said Yes);
How much emphasis are their companies putting on public ESG rating(s) (Only 1 of 16 respondents indicated significant emphasis); and
What level of engagement are risk teams having with other corporate functions around the sustainability and climate-related risk (44% indicated they are engaging with both their Legal and Sustainability teams among others).
The panelists also tackled numerous pressing questions about the current state of ESG ratings, both in the US and Europe, how they are calculated, their importance to various stakeholders, the difference between ESG and credit ratings as well as the sources and quality of data being used to calculate ESG ratings.
Key take-aways from this interesting and informative panel are as follows:
Despite the politization and debate over the usefulness of ESG ratings in the US, it appears inevitable that publicly traded companies, especially those operating in Europe, are and will continue to be rated on their ESG-related performance;
Companies should actively engage with ESG raters to help ensure applicable, timely, and accurate data, including non-publicly available data, are being used in the rating process;
ESG ratings are and will increasingly impact credit ratings and access to capital;
The assurance industry, including audit firms, are building capacity to translate non-financial risk to financial risk; and
High ESG scores will provide a competitive advantage to companies in the future (i.e., strong values will equate to higher value).
Tom Birmingham
Founder, TRB Consulting
tombirmingham88@gmail.com
To hear more from our panelists, please click here for access to the recording.