ESG Performance and the Credit Markets

Joshua A. Feltman and Emily D. Johnson, Wachtell, Lipton, Rosen & Katz write:

Over time, we expect companies to find their cost of capital more directly tied to their ESG risk, which firms are lining up to help investors evaluate. All of the major credit ratings agencies have signed onto the Principles for Responsible Investment statement that ESG factors can weigh on default probability, and consider such factors in their ratings. Some also offer stand-alone ESG products, as do independent specialist firms. As an indicator of the growing demand for ESG data and analysis, both Moody’s and S&P made strategic acquisitions in the ESG-data space in 2019. Morningstar took a 40 percent stake in Sustainalytics in 2017.

Notwithstanding the plethora of firms, investors and analysts propounding their own views on which ESG metrics matter and to what degree, the vast potential of ESG-informed financing has yet to be tapped. Accelerating its growth depends on the availability of consistent and comparable data across firms. Universally acknowledged as lacking today, standardization is coming. The World Economic Forum, for example, recently released a Consultation Draft of proposed common standards for corporate disclosure of ESG factors. Companies will have little choice but to respond to investor, and in some cases regulatory, demand for useful information.

via ESG Performance and the Credit Markets

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