[Article] Credit Ratings versus ESG Ratings

In BDA's Fixed Income Insights Spring 2023 edition, Triet Nguyen raises some important considerations about credit ratings and ESG ratings and how to sidestep today's cultural and political 'ESG' minefields.

Over the past year, the municipal market has been increasingly drawn into the cultural and political wars over the increasing integration of “ESG” factors in investment management. Several conservative-leaning states have joined together to decry the potentially negative impact of ESG factors on their debt ratings. They have put the rating agencies on notice about integrating non-financial, values-based factors into their rating process.

In this Fixed Income Insights article, DPC DATA VP of Strategic Data Operations Triet Nguyen points out that the leading Credit Rating Agencies’ (CRAs) approach to ESG, with some exceptions, have contributed to the confusion about what credit ratings and ESG ratings mean. Further, they foster issuers’ distrust of any ESG-aware approach to credit ratings.

His article examines the overlap and differences between credit ratings and ESG ratings. Credit ratings, he says, are designed to provide investors with an assessment of the creditworthiness and the probability of default for an issuer (or a specific instrument of such issuer). What the so-called “ESG” ratings represent is not so clear-cut.

As Triet says, “…by calling out the so-called “ESG” components in their credit rating methodology, the CRAs have unwittingly invited the wrath of some of their conservative-leaning clients and put the municipal industry in the cultural war crosshairs.”

A Failure of Both Credit and ESG Ratings Services: Silicon Valley Bank

At the end of the day, the difference between the two ratings boils down to the distinction between the “Risk” component and the “Impact” component of ESG. Failure to make the distinction between the “Risk” and “Impact” components can result in wildly inaccurate credit ratings and ESG ratings. Just consider the recent case of Silicon Valley Bank (“SVB”) >>>>Download the article

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