State Financial Officers Challenge Credit Rating Agencies on Climate Policies

A group of twenty-two state financial officers is pressing major credit rating agencies like Moody’s, Fitch, and Standard & Poor’s for explanations regarding their reliance on outdated climate change assessments. The officers claim this approach inexplicably results in higher ratings for Chinese companies while U.S. firms face downgrades.

In a letter sent to the agencies on Wednesday, the state treasurers and auditors expressed concern that the use of the discredited “Environmental, Social, and Governance” (ESG) framework could negatively impact their financial stability. They highlighted that significant losses for publicly traded companies in which their states have invested could lead to diminished funding for essential services like infrastructure, education, and public sector pensions.

The letter pointed to a specific instance where S&P downgraded American oil and gas companies due to supposed ESG-related “risks,” while maintaining an A+ rating for two Chinese state-owned oil firms, arguing they would “likely fare better than their international peers.” This, the financial officers said, makes little sense given that China is the largest polluter globally and has a poor track record on human rights.

Though the letter criticizes the rating agencies for their apparent alignment with environmental ideals, it also takes issue with the ESG framework, which is often criticized for prioritizing diversity and environmental concerns.

The state financial officers stated, “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.” They urged these agencies to adopt more objective methodologies and to reverse downgrades influenced by unreliable predictions.

The financial officers also raised concerns about how the credit rating agencies have relied on outdated studies, including one that was retracted due to flaws pointed out by other researchers, yet still utilized by Moody’s and S&P. They noted that this study projected severe economic losses from climate change consequences.

OJ Oleka, CEO of the State Financial Officers Foundation, commented that this letter serves as a warning to the top credit rating agencies about their political maneuvers affecting everyday Americans, while also presenting an opportunity to refocus on their true purpose.

Moreover, the agencies have been criticized for depending on various predictions about fossil fuel usage that have failed to materialize, suggesting that forecasts of reduced fossil fuel consumption do not reflect current trends. While emissions growth has slowed, there hasn’t been a significant drop in fossil fuel use, and policy changes at the federal level have further complicated the landscape.

The state treasurers emphasized that credit ratings should be based on objective financial assessments rather than political considerations. They are seeking clarity on how the retracted studies are factored into the agencies’ evaluations and how ESG influences their credit ratings.

The letter was signed by auditors and treasurers from 17 states, which include Arizona, Arkansas, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Utah, and West Virginia.