Credit rating companies are muscling their way into the burgeoning world of responsible investing, purchasing smaller outfits that provide environmental, social and governance (ESG) scores.
S&P Global Inc. is acquiring RobecoSAM’s ESG ratings business in a bid to compete with other major providers. Its biggest rival, Moody’s Investors Service Inc., bought a minority stake in China-based SynTao Green Finance last month and a majority of Vigeo Eiris in April.
The RobecoSAM deal will enable S&P to build on existing “already scalable data factory and platform,” according to John Berisford, S&P Global Ratings president. The 159-year-old ratings provider is also leaving the door open for more acquisitions in the future, as data is “enormously important” for companies that want to lead in the sector, he added.
“ESG is one of our top priorities on growth,” Berisford said in a telephone interview. “We have an excellent balance sheet and to the extent that we find things that would be attractive that would add more capabilities, I would say that we are open-minded and interested.”
Moody’s also acquired in July a majority stake in California-based Four Twenty Seven Inc., a provider of data, intelligence, and analysis related to climate risks. “Our recent acquisitions demonstrate that we aim to be a leader in stand-alone ESG capabilities, including sustainable finance and climate risk data, assessments, and benchmarks,” Moody’s said in an emailed statement Friday.
The explosion of investment products that are marketed as being environmentally and socially responsible is fueling the demand for ESG data and scores. Globally, bond and loan issuers have sold more than $400 billion of green and sustainable bonds and loans this year surpassing 2018’s full-year total of $315 billion, according to data compiled by Bloomberg and BloombergNEF.
ESG ratings have been mostly used by investment-grade bond and loan issuers who tie their sustainability performance to transaction terms or pricing. This year, usage of ESG scores started to spread to leveraged loans, collateralized loan obligations, and even a little-known German debt called Schuldschein.
The acquisitions by traditional credit ratings providers are not surprising since “ESG is not embedded in their DNA,” and it makes sense for them to be aggressive, according to Marija Kramer, managing director at Institutional Shareholder Services’s ESG rating arm, adding that the unit has been courted by major rating companies in recent years.
“They are acquiring the methodology and knowledge that ESG firms like ours have long held,” said Kramer in an interview.
Despite mounting takeover pressure, smaller ESG raters are counting on their expertise to continue competing with credit rating providers with bigger budgets and larger footprints. Rating ESG is “a lot more complex” than assessing credit scores and the conditions keep changing, according to Pierre-Francois Thaler, co-founder and co-CEO of Paris-based ESG rater EcoVadis SAS.