Standard & Poor’s (S&P) has announced to consider Environmental, Social, and Governance (ESG) factors when analyzing the credit rating of public financial entities in the US. In one of their recent publications, S&P has provided a list of ESG example criteria for credit quality assessments, and encouraged public financial institutions to improve on disclosure transparency in governance, strategy, risk management, and decision of specific metrics and targets.
In recent years, there is a more apparent relationship between ESG factors and financial entities’ cash flows and probability of default, and the problems of extreme weather occurred lately have demonstrated what possible damages and loss natural disasters would cause to entities’ operation. It is pointed out that there would be a continuous increase in the threat and impacts on business operations as climate problems arise more frequently and become normal in countries around the world. As a result, S&P finds including ESG factors as credit rating criteria important and necessary, so as to assess entities’ ability to respond to, plan for and even reduce the possible impacts brought by future disasters, as well as entities’ financial flexibility in tackling the challenges.
Regarding the environmental criterion, S&P emphasises the importance of early preparation for future environmental problems, such as capital planning and mitigation; regarding the social criterion, entities should not only consider demographic data, but also the provision of services for improving income and poverty level in society; regarding the governance criterion, the key foci include the entities’ institutional framework, operation and management policies, and transparency of financial data.
Moreover, according to S&P, there is an increasing trend of ESG disclosure in the market, but a consistent disclosure guideline is needed which can be used for effectively assessing the ESG factors of the public financial entities at state, regional and local levels.
Source: https://www.spratings.com/en_US/products/-/product-detail/our-approach-to-esg-in-ratings
