Credit Rating Agencies Go Green

Credit Rating Agencies Go Green

about 4 years ago3 mins

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As credit rating agencies follow in environmentally minded investors’ (carbon) footsteps, they’ve started to become greener. Perhaps they’re hoping that green opportunities will lead to the green they really care about…

🕰️ Recap

  • Last year, US regulators began to crack down on sales of flavored e-cigarettes
  • In April, US oil major Chevron announced a bid to acquire rival Anadarko Petroleum, aiming to increase its exposure to liquefied natural gas
  • A report published in June estimated the effects of climate change could cost the world’s biggest companies a combined $1 trillion
  • And earlier this month, Goldman Sachs hosted a conference for companies and investors to discuss their environmental, social, and governance (ESG) responsibilities

🔗 Connecting The Dots

Socially responsible, ethical, sustainable, ESG: they’re all different types of investing that mean different things – even if lots of investors use them interchangeably. But they all, put simply, aim to consider the wider environmental – rather than purely financial – impact of an investment. And they’re a sign that, as the world increasingly faces challenges from climate change, investors and companies alike want to be (or at least want to appear to be) more thoughtful about the effects they’re having on the world.

Take BHP, the world’s largest mining company: in a surprising turn of events earlier this month, it saw almost a third of its shareholders vote for the company to cut ties with an industry association that’s lobbied in favor of the fossil fuel industry. While it wasn’t enough to force BHP into action, it served as a reminder that climate-focused investors might be able to effect more change by owning stakes in “environmentally unfriendly” firms than by avoiding them. Of course, these investors weren’t necessarily acting entirely altruistically: research has shown the top ESG funds are generating better returns than their less socially responsible peers.

Last week, credit rating agency Moody’s lowered its outlook for oil company Exxon’s debt, saying rising costs had increased the likelihood it’d miss a repayment. But Moody’s already warned investors last year that oil and gas firms – alongside some utilities, logistics, and mining companies – were at risk of falling foul of its assessments, given the potential expense involved in reducing their pollution. This year, rival credit rating agencies seem to have taken the issue more seriously, introducing ESG scores and buying sustainability-focused research firms.

🥡 Takeaways

Intensifying competition among “passive investment” providers has seen a drastic fall in their fees, making it more cost-effective to invest in purpose-driven companies. And as more than $30 trillion is expected to fall under the oversight of US millennials in the coming years, ethical investing is projected to become a much larger part of investment portfolios. Non-investors are making their voices heard too: the recent trend toward veganism has been noticeable, with a third of the UK population now regularly purchasing plant-based milk – and more consumers are cutting down on meat consumption, citing both health and environmental reasons.

A recent report by the Wall Street Journal found that eight of the top ten ESG funds are invested in oil and gas companies – which may be at odds with what you’d expect from an “environmental” fund. There’s not much control of ESG funds, partly because there’s no single definition of what actually qualifies as “ESG”. And because these funds typically aim to track the broader stock market, they still have to invest broadly – including in sectors that aren’t actually socially responsible.

🎯 Also On Our Radar

Last year, German utility companies E.ON and RWE agreed a $66 billion mega deal. As part of the agreement, E.ON took over British energy firm Npower, but that’s now led to a restructuring plan, announced on Friday, which includes cutting 4,500 jobs. This may come as an electric shock, particularly considering the company’s not exactly short on cash: it also announced its profit this year would be higher than it’d previously promised.

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