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Proposal for Environmental, Social, and Governance (ESG) Assessments

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Proposal for Environmental, Social, and Governance (ESG) Assessments

A potential new ESG evaluation framework and scoring methodology is being developed for corporate issuers (referred to herein as the "ESG assessment tool" or the "tool"), and S&P Global Ratings is seeking feedback. The methodology is to evaluate a company's impact on the natural and social environments it inhabits, the governance mechanisms it has in place to oversee those effects, and potential losses it may face as a result of its exposures to such environmental and social risks. These losses (or increased costs) could stem from a variety of sources including potential increased/changed regulations, litigation, manmade or natural catastrophe events, and resource scarcity/degradation, among others. We believe these potential impacts, in turn, could weaken a company's business risk and financial risk profiles over time, unless properly managed, including effective mitigation strategies. The ESG assessment tool is not a credit rating.

In May, S&P Global Ratings expressed support for initiatives being promulgated by the United Nations Principles for Responsible Investment (UN-PRI) that recognize the needs of investors for greater clarity on how ESG factors are considered in credit analysis. This reflects our commitment to transparency in the way in which we consider ESG factors when determining credit ratings, and support for industry efforts to encourage consistent public disclosure by issuers on ESG factors that may impact creditworthiness.

Our proposed ESG assessment tool is not part of our credit rating methodology. However, we do consider certain related factors, as set forth in "Management And Governance Credit Factors For Corporate Entities And Insurers" (M&G), published Nov. 13, 2012, which includes reference to the management of environmental and social risks and the oversight of these risks by a company's board of directors. The proposed ESG assessments would be offered separately from our credit ratings to provide greater transparency into ESG risk.

We propose ranking rated issuers on a five-point scale based on our view of the degree to which each issuer has greater or lesser exposure to ESG risk over the medium to long term. We define medium term as the next two to five years, and long term beyond five years. We expect to assign different weightings to the medium-term and long-term horizon, and propose greater weighting toward the medium term. This reflects our view that medium-term risk is more discernable, and that the impacts of these nearer-term risks are more assessable in terms of risk to creditworthiness.

We are considering basing our ESG assessments on four main pillars, or subfactors:

  • Subfactor A: Environmental Risk Profile (E)
  • Subfactor B: Social Risk Profile (S)
  • Subfactor C: Management and Governance (G)
  • Subfactor D: Environmental and Social Risk Management

The proposed framework would also consider incorporating a mitigation history modifier for subfactors A and B, so we could differentiate a company with a strong environmental and social mitigation history over a given time period (we are proposing the past 10 years, on a rolling forward basis) from one with weaker mitigation risk, as seen in the number of E and S related adverse events during that period. This historical view would be balanced and weighted against the forward-looking perspective of our fourth pillar, the environmental and social risk management assessment.

We are proposing to give the four subfactors different weightings based on our view of their importance relative to the other subfactors. We are endeavoring to make these subfactor weightings the same for all issuers, so that the results of the ESG assessment tool can be comparable across different industries and peer groups.

We look forward to receiving your responses to our questions, and any additional observations, and discussing our approach with investors, issuers, governments, multilaterals and intermediaries.

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