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Credit FAQ: Understanding S&P Global Ratings' ESG Credit Indicators

S&P Global Ratings answers various questions that investors, issuers, and other market participants may have regarding its environmental, social, and governance (ESG) credit indicators.

Frequently Asked Questions

What are ESG credit indicators?

ESG credit indicators provide additional transparency on what's already incorporated into our credit rating analysis. They are another step in our efforts to enhance the usability and accessibility of our credit rating reports and related research. Through a simple numerical scale, they illustrate the ESG-related aspects of the credit rating analysis that are discussed in the body of our credit rating reports on rated entities. Together with the narrative discussion in our credit rating reports, ESG credit indicators help to further delineate and summarize the relevance of these ESG factors in our credit rating analysis.

How is ESG relevant to credit ratings?

In our credit rating analysis, we evaluate whether and/or how different credit factors have a negative or positive impact on creditworthiness; these can include ESG factors. Not all ESG factors materially influence creditworthiness. We incorporate ESG factors into our credit ratings when we believe they are material to creditworthiness and sufficiently visible. We refer to this subset of ESG factors as ESG credit factors. The influence of ESG credit factors can differ across industries, geographies, and entities.

Aren't some ESG factors highly uncertain and hard to quantify?

Our credit ratings are forward-looking opinions that are informed by an entity's current and past performance and include both qualitative and quantitative factors. We incorporate ESG factors into our credit ratings when we believe they are material to creditworthiness and sufficiently visible. We incorporate risks that we view as already present--such as added capital expenditure or infrastructure investment entities need to make to remain competitive and offset risks--or that we think are sufficiently visible to materialize in the future. This part of our credit rating analysis involves a blend of quantitative and qualitative analysis, just as we've always done with many other areas of our analysis, such as our competitive position analysis for corporates or institutional assessment for sovereigns. The qualitative component of our credit rating analysis is informed by available data, discussions with management, and robust peer analysis.

An entity's exposure to credit factors, including ESG credit factors, and how that exposure is managed and mitigated, may evolve over time. Examples of ESG credit factors that could evolve over time include increased exposure to potential costs associated with extreme weather events (such as hurricanes, flooding, wildfires, and drought), costs associated with aging demographics and declining population trends, and/or costs associated with water scarcity or supply limitations.

Can ESG credit indicators cause upgrades or downgrades?

No. ESG credit indicators cannot cause upgrades or downgrades. ESG credit indicators provide additional transparency on what's already incorporated into our credit rating analysis.

Why are you providing ESG credit indicators now?

Market participants have increasingly been seeking more data and insights relating to ESG, including how these risks or opportunities can affect creditworthiness. The spectrum of risks now commonly referred to as "ESG" have long been incorporated into our credit rating analyses using our sector-specific criteria. Beginning in 2015 we began publishing a series of reports on the extent to which ESG factors affected our evaluation of credit quality. More recently, S&P Global Ratings has been taking a number of initiatives to more clearly identify in its credit rating reports and related research the subset of ESG factors considered in its credit analysis. These initiatives have included adding paragraphs in our credit rating reports that discuss ESG credit factors. We also published criteria ("General Criteria: Environmental, Social, And Governance Principles In Credit Ratings," published Oct. 10, 2021) where we formalized and restated our existing analytical approach to incorporating the impact of ESG credit factors in our credit rating analysis. ESG credit indicators are the latest in our efforts to enhance transparency on the ESG-related aspects of our credit rating analysis.

Are ESG credit indicators the same as an ESG rating or ESG score, or a stand-alone measure of ESG credentials?

No. ESG credit indicators are not sustainability ratings or a stand-alone assessment of an entity's ESG performance. Rather, they reflect the influence that ESG factors have on our credit rating analysis.

S&P Global Ratings also offers ESG evaluations, and S&P Global Sustainable1 produces ESG Scores. How do these relate to credit ratings and ESG credit indicators?

ESG credit indicators, and the credit ratings to which they relate, are separate and distinct from S&P Global ESG Scores and ESG evaluations. For more information on ESG evaluations see "Environmental, Social, And Governance Evaluation Analytical Approach," published Dec. 15, 2020, and for more information on S&P Global ESG Scores click here.

How does S&P Global Ratings ensure the quality, integrity, and transparency of its credit ratings?

Our credit ratings are designed to provide relative rankings of creditworthiness. They are assigned based on transparent methodologies available publicly on our website. These methodologies are calibrated using stress scenarios (see Understanding Credit Ratings and S&P Global Ratings Definitions) and credit stability criteria designed to promote rating comparability across different sectors and over time. They are subject to a rigorous independent validation process.

Credit ratings are assigned by committees composed of analysts and consider a broad range of financial and business attributes, along with other factors, such as competitive position, business risk profile, and the current economic environment, using the relevant methodologies.

As part of ratings surveillance, we analyze real-time and historical data on an ongoing basis. The goal of this surveillance is to keep the rating current by identifying issues that may affect our view on an issuer's relative creditworthiness, and adjusting our ratings as appropriate. It is because our ratings evolve over time to reflect market changes or issuer-specific credit drivers that they are seen to have value as one of many inputs market participants may consider when assessing credit risk.

We publish default and transition studies annually that show the performance of our ratings over time.

We fully separate commercial and analytical activities. Analysts cannot engage in sales or marketing activities, commercial staff cannot engage in credit rating activities, and communications between commercial and analytical staff are restricted and, in many cases, monitored by our Compliance department. For example, an analyst may not learn of the commercial aspects of a transaction.

For more information, visit Understanding Credit Ratings.

Related Criteria And Research

Related Criteria
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This report does not constitute a rating action.

Primary Credit Analysts:Gregg Lemos-Stein, CFA, New York + 212438 1809;
Nora G Wittstruck, New York + (212) 438-8589;
Pierre Georges, Paris + 33 14 420 6735;
Karl Nietvelt, Paris + 33 14 420 6751;

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