Credit ratings: is it time for a rethink by the agencies and also by the investors?
In 1992, there were 98 U.S. companies that held the highest credit rating from Standard & Poors (S&P), the ratings agency. Today, the number has fallen to just two U.S. companies: Johnson & Johnson (NYSE: JNJ) and Microsoft (NASDAQ: MSFT), reported the Financial Times (FT) this week.
Just a handful of companies in the world retain the coveted rating from S&P, said the paper, after ExxonMobil (NYSE: XOM) was downgraded last month. What is going on?
“The demise of triple A-rated companies reflects a dramatic rise in the use of debt to help bolster shareholder returns and fund takeover activity,” said FT coverage. It is a trend that “shows little sign of ending in the current era of ultra-low borrowing costs,” it added.
Relieving ExxonMobil of its long-held triple A rating had to do with the strain plunging oil prices, and rising debt, have put on the company’s balance sheet. The company had roughly $35 billion of net debt at the end of 2015. Rating agency Moody’s also put Exxon on a negative outlook in February, indicating a downgrade from its triple A rating was possible.
But oil companies have also been in the spotlight recently for a number of other reasons, including shareholder disquiet about environmental, social and governance (ESG) concerns. While they are unlikely to have had any impact on credit ratings to date, they are worth considering.
On May 25 in London at the Exxon AGM, Resolution 12 or the ‘Publish Annual Climate Change Report’ found support from 38.2 percent of shareholders who voted for it, more than ever before.
This resolution's sponsor was the New York State Common Retirement Fund, which holds nearly 11 million Exxon shares and wanted the company to publish a report annually that would outline how climate change could affect the company's ability to operate. Exxon’s board recommended that shareholders vote against the resolution.
“An unprecedented number of Exxon’s shareholders have demanded that it analyze how a 2°C transition will impact its business. Exxon must now meet this demand or confront a ‘more wary’ investor class next year,” said Rob Schuwerk, Senior Counsel for Carbon Tracker, the London-based initiative that monitors carbon emissions globally.
Shareholder resolutions demanding that companies publish their strategy on changing their business against the backdrop of pressure on climate action are fast becoming the norm. European coverage of these matters however, often has a different nuance from coverage in the United States.
But it is a fact that more than 15,000 people from 47 countries used Vote Your Pension to urge their pension providers to support climate resolutions both the ExxonMobil and Chevron (NYSE: CVX) AGMs, contacting more than 1000 funds, says the Asset Owners Disclosure Project (AODP), which is part of the largest global shareholder engagement campaign.
“This is the beginning of the end for Exxon’s oil based strategy. Many of the world’s biggest investors have sent a clear message to Big Oil that they want a 2 degree business plan that shows how companies will deliver shareholder value in the transition to a low-carbon economy. The board must listen and take action or lose the confidence of shareholders,” said Julian Poulter, CEO of AODP.
“This is good news for the millions of ordinary people who own Exxon shares through their retirement savings. Exxon’s current business strategy risks either calamitous climate change or huge losses in value if global climate change action leaves it with huge reserves of oil and gas that cannot be burned. But it can still prosper in the low-carbon transition by turning itself into a diversified energy company,” he added.
The rising emphasis on ESG has also not gone unnoticed by the global credit ratings agencies. They have been in talks on incorporating ESG into their credit ratings– with news on agreement expected very soon.Leading credit ratings agencies are now joining an initiative to look at ESG factors in a more systematic way, the UN-supported Principles for Responsible Investment (PRI) announced today, May 26.
Strong support from fixed-income investors has now resulted in 100 investors managing $16 trillion of assets, and six credit rating agencies signing a Statement on ESG in credit ratings.
This marks the start of a two-year program funded by The Rockefeller Foundation to bring investors and credit ratings agencies together in a series of ratings forums around the world to discuss the links between ESG and creditworthiness. The project has been initiated by the PRI with support from the UNEP Inquiry and a committee of PRI signatories, which include some of the world’s largest fixed income investors.
“Credit rating agencies are a crucial part of the puzzle for identifying systemic ESG risks in debt capital markets,” said Fiona Reynolds, managing director of the PRI. “By signing this Statement, these organizations are affirming their commitment to more systematic and transparent consideration of sustainability and governance factors in credit ratings and analysis.”
“Investors are paying close attention to how ESG factors are considered in the credit rating process - that’s clear from the number of investors who have signed this statement,” said Michael Wilkins, managing director and head of environmental and climate risk research at S&P Global Ratings.
“We’re keenly aware of this growing interest in quantifying environmental, social and governance factors, and we’re focused on closing the information gap and deepening our analysis on these issues,” he added.
Dina Medland is an independent writer, editor and commentator with a strong focus on issues around corporate governance, ethics, the workings of the boardroom and sustainable business. She is on the team of contributors to @ForbesEurope and is an ex-Financial Times staff member who has been a regular contributor in recent years. Further details about her background and a portfolio of work – including her commercially sponsored blog ‘Board Talk’ are available on her website http://www.dinamedland.com