Talking about rating of credit of companies or states, commonly refers to the judgments that specialized agencies offer to the market regarding the sustainability of the debt issued or intending to issue. In fact it is an evaluation (literally rating = classification), expressed in the form of a grade, similar to the one that teachers give to pupils in schools. The higher the rating, the greater the reliability of the debtor in meeting its obligations towards creditors.
These ratings have now existed for much more than a century, that is, since issuers began to systematically turn to the market as an alternative to the banking channel to obtain financing to support projects of considerable value. The market, however, does not have the same information that a bank that has a privileged relationship with the company requesting credit can have, therefore the evaluation of the reliability of the issuer, of the quality of the debt issued also in relation to the maturity and the contractual conditions, and its sustainability in relation to the company's previous exposures is complicated. Furthermore, even if all this information were available to the public, there are some investors who, not being professional, would not be able to make appropriate use of it.
Credit rating agencies fill this information gap, providing the market with a concise and easily understandable assessment of the debtor's reliability and the quality of the debt issued. These assessments are carried out through a mix of quantitative and qualitative factors. The former are essentially deriving from the economic-financial analyzes of the issuer on the basis of balance sheet data, sector data and general market trends, from which analysts deduce the main financial evaluation quantities (e.g. cash flows, remuneration of capital, financial leverage). The latter refer to the subjective assessment of analysts regarding the quality of the investment projects, the reliability of the management and the credibility of the economic targets that the issuer sets itself.
The complexity of the analyzes and their cost has pushed the market towards a strong concentration in three agencies that currently dominate the overall scenario: Moody's has a market share of 40%, Standard&Poor's 39% and Fitch 16%. They make use of standardized scales (the grades mentioned above) which, although not completely coincident, have numerous areas of overlap. By way of example, the figure shows the rating scales of the three main agencies:
First of all, debt is distinguished by maturity: long-term debt, i.e. with a duration exceeding one year, is evaluated with different and more granular scales compared to short-term debt (since in a shorter time period it is less likely for events to occur that undermine reliability). The other distinction is by debt risk class: investment grade (from AAA to BBB-, i.e. with a "grade" that makes them a safe investment), high yield (from BB+ to C, i.e. with a high return compared to of a high risk) and default (defaulting). The least risky debt is that belonging to the first class, while as we approach the default level the risk level grows exponentially. Risk impacts rates and prices: the greater the risk to which the investor is exposed, the higher the rate of return required. This mechanism has purely statistical reasons: from the data observed over a 10-year horizon, a debt judged to be AAA has a probability of going into default of 0,66%, a BBB debt of 3,76% while if it drops to BB the probability of default rises to 13,33% (Source: Source: S&P, Annual 2016 Global Corporate Default Study and Rating Transitions).
Given the relevance of the economic impact of the judgments expressed by the rating agencies and driven by the failure to recognize the risks of companies that have gone into default, which has given rise to real financial scandals (e.g. Enron, Parmalat, Lehman), there have been raised many doubts about the reliability of the ratings and the independence of the agencies that develop them. The greatest doubts emerge in relation to the ratings that companies assign upon request of an issuer that pays for this service (solicited rating), which casts a shadow on the third party of the evaluator with respect to the evaluated one; other questions are raised in relation to the ownership structure of rating agencies, which may have significant conflicts of interest with respect to the opinions expressed on certain issuers.
For these reasons, rating agencies are subject to supervision and specific legislation. European legislation provides that the national authorities (in Italy, Consob) supervise the work of the agencies in collaboration with the authorities of the member states, making use of the competent body and involving the European Securities and Markets Authority (ESMA). Furthermore, in 2008 the European Commission issued specific regulations to prevent and mitigate the risks of conflicts of interest inherent in the activity carried out by rating agencies, through the adoption of governance systems that guarantee greater autonomy in the evaluation processes and the verification of the evaluation procedures followed.
In recent years, however, the concept of an issuer's sustainability has extended beyond the economic sphere captured by credit ratings, also including the environmental and social impact of an economic operator's ways of producing and competing. ESG ratings (an acronym for Environmental, Social and Governance) are the result of analyzes carried out by agencies specialized in evaluating the non-financial sustainability issues of companies and states. Sustainability has become the central theme of political and regulator agendas, also under the pressure of a public opinion increasingly convinced of the importance of the topic due to increasingly frequent and severe climate crises. Companies and financial intermediaries try to incorporate the issue of sustainability into their production and investment processes; however, measuring the sustainability of an economic operator is an almost impossible challenge from a methodological point of view because it requires combining conflicting elements together that are often difficult to measure. The need to minimize the environmental impact in the ways of producing and competing must be considered together with the repercussions on society as a whole, so that the costs of the transition are not entirely paid by the workers, customers or communities where a company operates; There are strong needs for corporate governance that takes into account, together with the primary rights of shareholders, also the requests coming from other stakeholders, without entering into a process of decision-making stalemate.
Even though we are all aware of the difficulty of the process and the approximation of these measures, in a short period of time there has been a rapid diffusion of the use of ESG ratings in various fields, from finance to corporate reporting up to their use as remuneration parameters for directors. The reasons are simple: it is a practical, fast and easily implementable way in the various economic-financial evaluation models, because they are thought of as scores which then generate easy-to-read rating scales that allow an economic operator to be positioned in the context of his business . To meet the growing demand, numerous agencies have been created specializing in the development of ESG ratings: the European Commission lists 59 of them, of which 30 are based in the EU and 29 outside. It is good, however, to note that global players are few. Among these are: Refinitiv ESG Rating, MSCI ESG Rating, Sustainalytics ESG Rating, Bloomberg ESG Disclosure Score, Moodys' ESG Rating, S&P Global ESG Rank (Escrig-Olmendo et al., 2019; Berg et al., 2019 and 2022) .
Each of these agencies, operating in a context without specific regulation at a global level, uses a proprietary model to quantify sustainability with a score which then becomes a rating. The comparability of the ratings produced by the various agencies is limited due to the complexity of the method and the lack of transparency regarding the various processes of aggregation of the variables and definition of the weights that characterize them. Even on the rating scales used it is impossible to make a comparison like the one presented on credit ratings. Furthermore, unlike credit rating agencies, these operators often rely on unaudited data and are not subject to regulation that mitigates potential conflicts of interest. In short, there is still a long way to go for ESG rating agencies to improve the quality and comparability of ratings.
It is interesting to note that the two major credit rating agencies (Moodys' and Standard&Poor's) are also among the major ESG rating players, having purchased over the years agencies specialized in the assessment of non-financial sustainability. In fact, debt sustainability analyzes are more refined if ESG risks are also considered in the issuer's risk assessment parameters. And, vice versa, the socio-environmental sustainability of an issuer must be adequately supported by the economic sustainability of the business.
The fact that sustainability rating agencies are progressively concentrating and that agencies that dealt exclusively with credit ratings have entered this market with determination suggests that, in the medium term, we will see the definition of a single sustainability rating , which will include both economic-financial and socio-environmental assessments as two sides of the same coin.
