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S&P Global Ratings’ Proposal For Environmental, Social, And Governance (ESG) Evaluations

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S&P Global Ratings’ Proposal For Environmental, Social, And Governance (ESG) Evaluations

Highlights

S&P Global Ratings is in the final stages of testing its new Environmental, Social, and Governance (ESG) Evaluation analytic approach. Our proposed analysis for an ESG Evaluation is both quantitative and qualitative. We aim to provide deep insight into an entity’s ESG exposure and its capability to manage this exposure by:

Leveraging our global analytical teams’ knowledge and understanding of sectors and regions to develop our ESG Risk Atlas;

Incorporating the results of an entity-specific ESG diagnostic questionnaire to capture relevant data;

Leveraging our existing understanding of an entity’s business and peers; and

Engaging in a substantive dialogue with management, including members of the board as appropriate.

Our ESG Evaluation combines our opinion of an entity’s relative exposure to observable ESGrelated risks and opportunities (the ESG “Profile”), with our qualitative opinion of the entity’s longterm preparedness for ESG related opportunities and disruptions (ESG “Preparedness”). In our analysis, we take a broad view of Governance to include potentially material risks or opportunities that the entity faces.

The final outcome will be a qualitative opinion from S&P Global Ratings’ analysts based on their sector and country knowledge and analysis, with entity-level analytical adjustments, and will be informed by interactive discussions with senior management, including members of the board.

The Evaluation will utilize data that entities supply directly through a new ESG Diagnostic questionnaire and incorporate environmental and other data from S&P Global Trucost and other S&P Global divisions.

The proposed ESG Evaluation is not a credit rating, a measure of credit risk, or a component of our credit rating methodology. However, the information we gather for an ESG Evaluation can inform our credit analysis of rated entities.

The ESG Evaluation will be a stand-alone, on-request service and separate from our credit ratings.

Summary of Analytic Approach

Our proposed ESG Evaluation is a cross-sector, relative analysis of an entity’s ability to operate successfully in the future and optimize long-term stakeholder value in light of its natural and social environment and the quality of its governance. Our definition of stakeholders for a particular entity goes beyond shareholders to include other groups as appropriate such as employees, the local community, government, regulators, customers, and suppliers. Our analysis is grounded in financial materiality by assessing the potential of ESG risks and opportunities to effect stakeholders that can have a financial impact, either directly or indirectly, on an entity. Under our proposed approach, we first establish an ESG Profile for a given entity, which assesses the exposure of an entity’s operations to observable ESG risks and opportunities, taking account of the governance structure in mitigating risks and capitalizing on opportunities.

Second, we assess the entity’s long-term Preparedness, namely its capacity to anticipate and adapt to a variety of long-term plausible disruptions. Such disruptions are not limited to environmental and social scenarios, but could also include technological or political changes where relevant. This is because, in our opinion, high-quality corporate governance includes the full spectrum of potential risks and opportunities an entity faces.

Our final ESG Evaluation score will combine an entity’s ESG Profile with our long-term Preparedness assessment, thereby indicating our view of how effectively the entity is set up to manage its ESG exposure and opportunities. The ESG Evaluation thus provides an opinion on an entity’s relative exposure to observable ESG-related risks and opportunities, and our qualitative opinion of the entity’s long-term Preparedness for opportunities and disruptions. Importantly, ESG Evaluations are not to be confused with credit ratings, which are separate opinions on creditworthiness (see box titled “How ESG Factors Affect The ESG Evaluation And Credit Quality” on page 3). However, the information we gather for an ESG Evaluation may inform our credit analysis of rated entities.

We are testing a ranking system which will equate the highest numeric position with the lowest exposure to ESG risks. An entity with a higher ESG Evaluation score would generally be seen to have:

  • Mature, effective, and well integrated ESG policies and processes at all management levels.
  • Best-practice strategic and operational execution.
  • Integration of ESG risks with enterprise risk management.
  • Well-mitigated (or non-material) environmental and social risks.
  • A best-practice, forward-looking, and strategic governance framework and policy implementation.
  • Agility and Preparedness to adapt to potential disruptions and opportunities.

Learn More in our Full Report.

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