ESG use by rating agencies targeted by state officials

State Treasurer of Utah’s Office

A group of Republican state treasurers and auditors sent a letter to rating agencies Wednesday, claiming their use of environmental, social and governance “predictions” harm state credit ratings and investments.

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The 22 officials from 17 states said these “false ESG predictions” threaten states’ ability to pay for roads and schools, “as well as pensions for police officers, firefighters, teachers and other employees,” according to the letter sent to S&P Global Ratings, Moody’s Ratings, Fitch Ratings, and U.S. Securities and Exchange Commission officials.

“Ratings agencies’ use of false ‘transition risk’ predictions or retracted ‘physical risk’ studies harm states by leading to unwarranted downgrades of their bonds, as well as decreasing the value of states’ shares in downgraded companies,” the letter said.

It follows similar anti-ESG efforts launched by government officials against the rating agencies, which did not immediately respond to requests for comment on the latest missive.

Oklahoma State Treasurer Todd Russ, who signed the letter, said on Thursday he was encouraged by a growing national effort “to ensure credit rating agencies base their assessments on objective, pecuniary factors directly relevant to an entity’s creditworthiness.”

“Credit ratings should reflect an entity’s ability to meet its financial obligations, not ideological priorities or policy objectives unrelated to its financial risk,” he said in a statement.

The letter criticized the agencies’ assignment of ESG-related negative credit factors and outlooks to fossil fuel producing states, as well as downgrades for U.S. energy companies.

“The ratings agencies’ use of ESG is so subjective and inconsistent that while American companies were downgraded, ratings were affirmed for state-owned Chinese companies that are worse by every objective ESG metric,” the letter said. “Ratings agencies should use objective and consistent methodologies instead of using false and retracted ESG predictions, and should reverse downgrades that were based on those false predictions.”

The rating agencies were asked to respond to a list of questions. 

Fitch, Moody’s, and S&P were targeted in April by Republican attorneys general from 23 states, who sent a lengthy letter, accusing them of downgrades “based on highly speculative ESG predictions and goals” that “violated stated methodologies and reflected undisclosed material conflicts of interest, implicating SEC rules and state consumer protection laws.”

The letter set deadlines for the agencies to provide specific information concerning their actions. A spokesperson for Nebraska Attorney General Mike Hilgers, one of the inquiry’s leaders, declined to comment earlier this month on its status. 

Democratic state officials countered in June, urging agencies to not bow to Republican pressure and to base their analyses on sound financial practices.

In 2022, S&P was singled out by state attorneys general and treasurers after it released an ESG credit indicator report card for all 50 states. 

The following year, S&P announced it will not put out new or updated ESG credit indicators in public finance, while continuing to address ESG credit factors in its reports.

Utah State Treasurer Marlo Oaks, who has led opposition to ESG use and signed the recent letter, said Thursday that while S&P’s decision was appreciated, an underlying problem remains.

“Ratings agencies continue to incorporate speculative ‘transition risk’ and ‘physical risk’ assumptions into credit decisions, potentially increasing borrowing costs and harming taxpayers based on politically contingent predictions that have failed to materialize or have been retracted,” he said in a statement. “Credit ratings should be grounded in objective, consistent financial analysis, not political assumptions about the future.”