Credit or ESG ratings, which matters more? - Cameron Hume

Is it true that credit rating agencies and bond markets successfully identify and price companies’ material non-financial factors?

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... Equifax was a 2017 ESG controversy where poor data security protocols, flagged well in advance, led to a large data breach compromising 150 million customers. Markets reacted with surprise to the breach as the company’s stock was sold off aggressively and credit spreads widened sharply. ESG rating agencies had flagged these cyber security issues well in advance, which investors chose to ignore. Credit rating agencies reacted only to the aftermath, with S&P moving to downgrade Equifax bonds in 2019 while Moody’s moved to downgrade in 2020. Had investors paid more attention to ESG risk factors prior to the breach, they may have created the financial incentive for Equifax to act sooner. Higher costs of finance would have given management an incentive to reduce this identified risk and thereby avoid the ensuing market turbulence, remediation costs, fines and the significant reputational damage associated with the breach.

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