Eye on Credit Rating Agencies
Martha Davis is a Professor of Business & Finance at Baker University and an Executive Advisor for Atrium Economics. Atrium Economics provides consulting, advisory, and regulatory expert witness services to energy and utility companies.
These days, most business practitioners know that ESG is a framework stakeholders use to evaluate an organization's sustainability performance related to environmental, social, and governance matters. However, what drives ESG risks and their impacts on the utility business model?
This article demystifies these lesser-known topics with a look under the hood at credit rating agencies. Specifically, how credit rating agencies consider ESG factors when evaluating the credit risk of utility companies, their methodologies for determining ESG scores, and considerations to position your utility favorably in the future.
ESG Considerations in Credit Ratings
Credit rating agencies offer opinions on an entity's creditworthiness. These ratings enable investors to quickly compare the risk-reward profile of certain investments and gain insights into an issuing entity's financial integrity.
The three major credit rating agencies are Fitch Ratings, Moody's, and S&P Global. Credit ratings are letter grades, such as AAA for the highest-rated investments. Credit rating agencies consider many variables, including ESG and non-ESG-related factors, when evaluating the credit risk of companies, and all these variables judge the likelihood of borrower default.