Monday, 22 May 2017

Article Preview: Credit Rating Agencies Attach Themselves to an Ethical and Responsible Movement

Today’s post previews a forthcoming article by this author, to be published in the International Business Law Journal, entitled ‘Credit Rating Agencies and Environmental, Social and Governance Considerations: A Long Road Ahead’ (the pre-published version can be found here). In this post, the topics that the article focuses upon, as well as its conclusions, will be reviewed against a discussion regarding a particular movement that is currently gaining prominence within the world of big business.

Briefly, the article is concerned with analysing the recent move by the leading credit rating agencies, in which they have pledged their support and apparent adherence to following the ‘Principles for Responsible Investment’ (PRI) initiative. Before assessing why the agencies have chosen on this particular course of action, the article introduces the PRI and its aims, with the intention of assessing whether the rating agencies, as we know them, seem to fit within similar ideals. The PRI is a ‘movement’, for want of a better description, that serves to mobilise investors and institutions to push for the recognition and implementation of responsible investment practices – it is also worth noting that it is financially supported by the United Nations, although the PRI is at pains to make clear that it is not part of the UN. Its ideology is based upon the need to implement environmental, social, and governance factors (ESG) into the investment process, which it aims to do so by adhering to the ‘six principles’ for responsible investment, which include: incorporating ESG issues into investment analysis and decision-making; actively incorporate ESG issues into ownership policies; appropriate disclosure of ESG-based considerations; promote acceptance of the PRI principles within the investment industry; a cohesive approach to implementing the principles, and finally; consistent reporting on activities relating to the principles. Exemplifying the technical differences between sustainable and environmentally-concerned business practices (although the PRI does tend to merge them together – they are not the same thing), the PRI states that they believe that an ‘economically efficient, sustainable global financial system is a necessity for long-term value creation’. So, with that in mind, those of you who know anything about the credit rating industry at all will be asking ‘how do the rating agencies fit into that mode of thought?’

After consultation by the PRI in 2015 with its members and interested observers, it found that that 78% of those surveyed wanted to see ESG concerns incorporated more explicitly into the ratings of the agencies. The article discusses how, prior to this concerted effort by the PRI, the business practices of the rating agencies were heavily criticised by the PRI for simply not doing enough, with interested onlookers scoring the agencies 2/10 for their efforts to incorporate ESG into their thinking when formulating ratings. The agencies responded by saying that they will adhere to the ideology, although the technical elements ‘may be defined differently’ and may not, necessarily, be labelled as typical ESG considerations. Yet, the article surmises that the noises coming from the agencies is the same as usual, and that when viewed in relation to the recent history of the agencies, the real reason for the apparent adherence to the PRI becomes clear.


Simply put, the leading rating agencies – S&P and Moody’s especially – have recently suffered an overt blow to their reputation. The recent fines of $1.35 billion and $730 million to S&P and Moody’s respectively has been covered in Financial Regulation Matters already on the back of two articles by this author, so there is little need to go over the actions of the Department of Justice again, but what is important for us is that the agencies – for the first time since receiving the coveted NRSRO status in the mid-1970s, have felt it necessary to respond to bad publicity (usually it does not matter). Whilst this author has no reason to believe that the agencies are worried about their position, because the agencies are well aware of the strength of their position, it is fascinating to see the agencies scramble to repair their reputation. Or is it? Again, as this author repeatedly calls for, it is vital we look at the agencies as they actually are, and not how they may appear to be, or even how we want them to be. This author has an article under consideration at a journal that looks at the real reason for this move into ESG and sustainable finance by the agencies, and the conclusion is that it is not to assist in the increase in responsible investment (a post will follow the acceptance of that article here in Financial Regulation Matters). No, then, the agencies are not adhering to the principles of responsible investment but are paying lip-service to the extremely important ideal; the article concludes by stating that the partnership between the agencies and the PRI demonstrates two important aspects: firstly, it shows the continuation of the unwavering support by the state and its connected organisations with regards to having faith in the agencies to act in the interests of anyone but themselves; secondly, the partnership heralds the beginning of a concerted ‘charm-offensive’ by the agencies, which is an attempt to heal some of the reputational damage caused by recent settlements and admissions. These elements are important to remember – because there may be a more sinister reason for the agencies’ movements (more to come on that front in the next article) – but most importantly it is vital that, for whatever reason, we do not succumb to the relatively easy conclusion that the agencies have learned their lesson – they have not, and nothing they say should change that; only the cessation of the institutionalised and transgressive business practices can change that.

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