Daniel Cash - Sustainability Rating Agencies vs Credit Rating Agencies: The Battle to Serve the Mainstream Investor

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A flurry of dealmaking has begun among firms that provide companies with environmental, social and governance ratings, fed by increasing demand for the data among investors and regulators. The sector has traditionally been dominated by index providers such as MSCI and a handful of specialist firms, such as Sustainalytics . Now Moodys and S&P Global, two of the big three credit rating agencies, are elbowing their way in, offering separate ESG scores on companies in addition to their traditional assessments of creditworthiness.

The article continued by discussing how the market for ESG information is growing all the time, and that the credit rating agencies are well aware of this. Whilst a number of aspects would need to be added to the credit rating agencies offerings, it was very much suggested that the two industries would come into contact at some point for the lucrative rewards that awaited them for adjoining to the movement of sustainable investment.

It is always wise to write a book like this, as if the reader is uninitiated with the world of credit ratings, because it is a somewhat niche element of the financial sector even though its impact came to light massively in the Financial Crisis. Nevertheless, this article in the FT made me wonder of what may affect that battle, and how it would play outthat is what this book is built on. In order to examine these questions further, we shall embark upon a journey that considers the development of the mainstreamisation of the concept of sustainable investment, the histories and trajectories of the two industries, the underlying dynamics of the rating relationship, and then after reviewing the regulatory developments in the area of non-financial informational disclosure, we shall conclude with an assessment of who is likely to win this battle that has been predicted.

The mainstreamisation of the concept of investing in a responsible and sustainable way is well under way. It is a direct response to the Financial Crisis and the actions of market participants who prioritised short-termism and an apparently blind faith in third-party verifiers of credit risk. The movement aims to force investors to consider elements of ESGEnvironmental, Social, and Governance factorsinto their decision making, which has the hope of forcing issuers to rise to the challenge also attached to it. The movement has been progressing, but is hitting snags along the way not that the leading investors are starting to turn their attention to it. On significant snag is the flow of information. From the issuers, investors want higher quality information. From the third-parties like ESG rating agencies and credit rating agencies, the investors want that higher quality information to be as standardised as possible, so that performance over industries and regions can be compared. As we shall see, there have been a number of initiatives developed that want to bring these requests to fruition, but they are also finding significant problems along the way. Now, with the E.U. and the U.S. taking very different approaches, there is even more divergence on the global scene and divergence is precisely what the investors do not want.