The 2008 financial crisis revealed to the world the decisive - and excessive - role that the rating agencies S&P, Moody's and Fitch Ratings have acquired in the financial assessment of governments and companies by banks and investors. Since the turn of the millennium, a new type of rating agency has been superimposed on these historic leaders. They have given themselves a much more ambitious mission: to analyze the practices of large groups in terms of respect for the environment, social rights and governance, in order to help investors identify the most virtuous companies.
They are called extra-financial rating agencies and therefore refer to environmental, social and governance (ESG) criteria, well known to socially responsible investors (SRI). Each has its own methodology, but the overall approach is common. Based on companies' annual reports, conversations with managers and external sources from NGOs or consultancies, they deliver assessments which are then weighted to arrive at a final grade. Some organizations are specialized. The British Trucost is thus recognized for its environmental analyzes, while the French EthiFinance focuses on small and medium-sized enterprises.
These extra-financial rating agencies are remunerated by investors and not by issuers of securities, unlike what traditional rating players practice. This limits potential conflicts of interest. However, a company can order a “solicited rating”. The influence of these agencies is growing as environmental and social concerns increase, with a poorly rated company running the risk of being excluded from certain SRI portfolios.
Proof of this nascent popularity, several extra-financial rating agencies have been bought out. In 2019, the giant Moody's acquired the Franco-British Vigeo Eiris chaired by Nicole Notat. Three years earlier, rival S&P had acquired Trucost. Similarly, the American ISS has acquired in recent years the German Oekom Research, the Swedish Ethix and the Swiss South Pole, specializing in climate rating. The most recent example: the financial rating expert for funds Morningstar acquired this year the Dutch SME Sustainalytics, a historical player in ESG rating. The appetite of American groups already raises concerns about a dominant position in this niche ...
Still, financial institutions prefer to create their own social and environmental rating tool. This is the case of the European bank UBS, which can be proud of a database of "more than 500 ESG indicators" and which has assigned a rating to 11,000 issuers of shares and bonds. In the years to come, the challenge for the sector will be to standardize the evaluation criteria to give these ratings even more credibility and influence.