‘There’s been a refocus on governance in ESG’, says S&P

The ratings agency has noticed the ‘growing trend’ of ESG-linked debt instruments as an additional variable for investors.

Prospective investors are placing a renewed emphasis on governance when making ESG evaluations, according to Standard and Poor’s.

The ratings agency launched its own ESG evaluation method in April to sit alongside its credit ratings service. The methodology, which evaluates an entity’s profile against ESG risks, gives 30 percent weightings for environmental and social factors, and a 40 percent weighting for governance issues.

“There’s been a refocus on governance as an issue,” Mike Wilkins, head of sustainable finance at S&P, tells Infrastructure Investor. “In our experience, we see governance having a bigger impact towards the evaluation than the other two components.

“Traditionally, the weighting towards the ‘E’ was much heavier as it was more visible, there was better data and general understanding of the issues. What we’re starting to see now more and more is how social factors are affecting a company, such as customer engagement, community relations and how a company deals with its workforce and safety management. All these factors can have an impact on financial performance.”

Impact on performance

The debate over ESG factors and financial performance came to light following a study by EDHECInfra. Wilkins believes the two issues are linked, albeit indirectly.

“We’ve found there’s certainly enough evidence to suggest there is some correlation between ESG and financial performance, in terms of the linkages between a company’s ESG score, share price and credit spread,” he says. “The fixed income side of this is still not definitive in terms of whether a good ESG performer does lead to stronger credit quality. That really does depend on a number of other factors, not just ESG.”

An additional “growing trend”, according to Wilkins, is the use of financial instruments linked to ESG.

Thames Water, a utility company serving the UK’s capital city, last year agreed a revolving credit facility with 13 banks that would tie the interest rate it would pay to its ESG score, as calculated by GRESB. The rate will be lowered if Thames Water outperforms the benchmark.

Spanish telecoms group Masmovil in May secured a €250 million RCF with a margin based on its ESG rating by MSCI.

“It’s a very significant development in the sense it shows how the investor community is now looking at different variables, including ESG factors, to make their investment decisions,” says Wilkins.