Financial officers warn rating agencies about using ESG in state credit ratings

One of the officials involved in the letter – Utah State Treasurer Marlo Oaks – told The Center Square that “credit ratings should be grounded in objective, consistent financial analysis, not political assumptions about the future.”

"Our concerns about subjective ESG criteria influencing state and local credit ratings date back several years,” Oaks said.

Oaks noted he appreciates S&P “taking those concerns seriously and discontinuing its ESG credit indicators,” calling this action “an important step.”

“But the underlying problem remains,” Oaks said. “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costs and harming taxpayers based on politically contingent predictions that have failed to materialize or have been retracted.”

The state financial officers wrote in their letter that ratings agencies’ credit ratings’ reliance on “false ESG predictions of ‘transition risk’ and retracted predictions of ‘physical risk’” harms states “by leading to unwarranted downgrades of their bonds, as well as decreasing the value of States’ shares in downgraded companies.”

Ratings agencies have “downgraded oil and gas companies and upgraded companies embracing ESG” based on supposed risks, the letter said. 

However, the agencies’ ESG predictions about transition risk have been proven wrong, and physical risk predictions cite retracted information, according to the officials.

The officials also pointed out the double standard of ESG downgrades when it comes to China.

For example, S&P downgraded “the oil and gas sector and American oil and gas companies based on ESG risks” while it reaffirmed “its A+ rating for two Chinese state-owned oil and gas companies,” even though these Chinese companies “are worse by every objective ESG metric,” the letter said.

“Similarly, Fitch has indicated no ESG risk for Chinese state-owned companies,” the letter said.

In their letter, the officers called for a reversal of downgrades based on false ESG predictions, as well as for ratings agencies to explain the influence ESG policies have had on states’ credit ratings.

The Center Square reached out to Fitch, Moody’s and S&P twice each individually for comment. None have responded by publishing.

CEO of State Financial Officers Foundation OJ Oleka told The Center Square that the financial officers’ “important letter puts the nation’s top credit rating agencies on notice for playing political games at the expense of everyday Americans, and it also gives them an opportunity to once again do what they were designed to do.”

“S&P, Moody’s and Fitch can be respected sources of objective financial analysis, or they can be activists for an outdated ideological agenda, but they cannot be both,” Oleka said.

“When false ESG predictions are used to weaken a state's credit rating, as we've seen happen, the financial security of millions of public employees is threatened,” Oleka said.

Will Hild, executive director of consumer advocacy organization Consumers’ Research, told The Center Square that “factoring ESG in credit ratings is what forced American car makers and energy companies to turn their backs on their loyal customers in pursuit of net-zero insanity, which made things more expensive for all Americans.

“The very fact that so-called 'ESG risk' resulted in some American companies getting downgraded while Chinese state-owned companies received high ratings should be enough to discredit this absurd metric permanently,” Hild said.

“No credit rating agency should base scores on ESG, period,” Hild said.

The state financial officers also sent their letter to the U.S. Securities and Exchange Commission, which has not yet responded to The Center Square’s request for comment.

Those signing the letter include Arizona Treasurer Kimberly Yee, Arkansas Auditor Dennis Milligan, Indiana Comptroller Elise Nieshalla, Indiana Treasurer Daniel Elliott, Kansas Treasurer Steven Johnson, Kentucky Auditor Allison Ball, Kentucky Treasurer Mark Metcalf, Louisiana Treasurer John Fleming, Mississippi Treasurer David McRae, Missouri Auditor Scott Fitzpatrick, Missouri Treasurer Vivek Malek, Nebraska Auditor Mike Foley, Nebraska Treasurer Joey Spellerberg, North Carolina Auditor Dave Boliek, North Dakota Treasurer Thomas Beadle, Ohio Treasurer Robert Sprague, Oklahoma Treasurer Todd Russ, Pennsylvania Treasurer Stacy Garrity, South Carolina Treasurer Curtis Loftis, Utah Auditor Tina Cannon, Utah Treasurer Marlo Oaks and West Virginia Treasurer Larry Pack.