S&P issues warning on ESG credit analysis

A lack of consistent sustainability data is making it tricky for analysts assessing corporate creditworthiness

S&P Global Ratings is urging companies to improve their ESG disclosures after a report revealed firms are failing to deliver consistent ESG data.

S&P’s latest ESG credit analysis report shows insufficient ESG disclosure is presenting a big problem for analysts when trying to assess a company’s creditworthiness.

As a result, the ratings agency is urging companies to adopt the Financial Stability Board’s (FSB) Taskforce on Climate-related Financial Disclosures (TCFD) framework to enable better reporting.

“The main challenges when evaluating ESG credit factors can be insufficient disclosure generally, or inconsistent disclosure across peers,” the S&P report said.

“In our view, the provision of comprehensive, comparable, and consistent disclosures around climate-related risks and opportunities by the entities we rate, as recommended by the TCFD, should make it easier to assess environmental credit factors and reflect them in ratings in a more consistent and transparent way,” the report added.

The US-based ratings firm believes TCFD-based disclosure would provide information that is more useable in the financial markets, including by S&P Global Ratings.

However, the company said it expects widespread changes in disclosure to take time as time as organisations decide whether to follow voluntary disclosure guidelines and adapt capabilities in order to facilitate disclosure requirements.

“Insufficient adoption of the voluntary recommendations or inconsistencies in disclosure could limit our credit rating analysts’ ability to perform peer analysis, which can be an important element of our credit rating analysis,” the report added

In its 2019 Status Report published in June, the TCFD found that despite the disclosure of information increasing among firms over the past three years, it was still below expected standards.

The report, which reviewed financial filings, integrated reports, annual reports, and sustainability reports, warned more clarity was needed on the potential financial impact of climate-related issues on firms.

The Task Force also found most companies fail to disclose information on the resilience of their strategies to investors.

The TCFD, established in 2015 to develop voluntary, consistent disclosure recommendations for the industry, is set to deliver another report to the Financial Stability Board in September 2020.