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States Fight Back Against ESG Report Card

How well your state aligns with the environmental and social justice agenda is a new determining factor for S&P's investment score.

Progressive banks, asset managers, and regulators have successfully imposed the social credit system known as ESG, which stands for environmental, social, and governance, on corporations. In their latest move, ESG will now be applied to states as well.

On March 31, credit rating agency Standard & Poor’s (S&P) published its first ESG “Report Card” for every U.S. state. This has infuriated some state officials, who are demanding that S&P drop this scoring system.

“It’s a political score,” said Utah State Treasurer Marlo Oaks. “We’re not going to play along with some outside organization giving us a political score that will determine whether we can borrow capital at the most advantageous rates or not.”

Rating agencies, such as S&P, Moody’s, and Fitch, provide credit scores for companies and governments that borrow money, similar to FICO scores for personal loans. Credit scores have traditionally been a quantitative measure of a borrower’s ability to repay and are a key factor in determining how much borrowers will pay in interest, or if they will be able to borrow at all. ESG, by contrast, focuses on climate activism and social justice issues.

According to S&P’s ESG Report Card, which grades states in each category on a 1 to 5 scale, with 1 being the most positive rating, Utah was graded a 3 out of 5 in the environmental category because of “water challenges.” The report stated that “environmental factors are a moderately negative consideration in our credit rating analysis for Utah,” citing concerns about how much water Utah may use as its population grows and climate change brings droughts.

“Utah has never been rated less than AAA,” Oaks said, which is S&P’s highest credit score. Any material risks regarding Utah’s ability to repay debt had been included in this general credit rating, he said. “Now the credit rating agencies come along and give us another score that could impact how inexpensively we can borrow money. It’s ridiculous!”

A letter to S&P signed by Utah Gov. Spencer Cox, Attorney General Sean Reyes, Sens. Mitt Romney and Mike Lee, and eight other U.S. Representatives and state officials including Oaks stated that “S&P’s ESG credit indicators politicize what should be a purely financial decision. This politicization has manifested itself in the capital markets where, for example, banks are pressured to cut off capital to the oil, gas, coal and firearms industries. ESG is a political rating and should be characterized as such.”

The State of Utah demanded that S&P provide information about how its ESG scores are determined, disclose any conflicts of interest, and explain “to what extent the energy independence of free and democratic countries factors into your models, including the ‘social’ factor in your ESG scores.”

West Virginia, which S&P cited for environmental and social concerns, has joined the protest.

Having achieved a budget surplus, “our fiscal health is in pristine order right now,” said State Treasurer Riley Moore. “We’ve been fiscally conservative and it has paid off hugely now that the economy has started to trend in a positive direction in West Virginia.”

But West Virginia got a negative environmental score from S&P because of the fact that “we have a lower reliance on renewable energy sources,” Moore said. “We’re a fossil fuel state,” the fifth largest energy producer in America.

“If ESG scores hurt our bond rating, we’re going to be financially punished until we bend to their will. None of us voted for this, we don’t have a say in this, but potentially we are going to be punished because we don’t fit their value set.”

In the social category, S&P gave West Virginia a 4 out of 5 and flagged concerns over its aging population, as well as its 0.3 percent net loss of residents. West Virginians attribute much of this population loss to political and financial initiatives against its fossil fuel industry, which has cost the state jobs. New York, which set a record for population loss in 2021, received a 2 in the social category.

S&P declined to respond to the criticisms from state officials but highlighted the following statement on why they created the ESG Report Card: “Through the release of ESG credit indicators, we aim to further delineate and summarize the relevance of ESG factors to our credit analysis by isolating our opinion on their credit influence and separating it from the non-ESG factors affecting the credit rating.”

ESG has been a cash cow for Wall Street, and so-called “sustainable” debt expanded to $723 billion in 2020, a 23 percent increase from 2019, according to a Morningstar report. “In 2021, new sustainable debt issuance outpaced all previous years combined.” The rating agencies, in step with banks and asset managers, have invested large sums to profit from ESG.

In 2019, S&P bought an ESG ratings company from RobecoSAM. S&P also provides Corporate Sustainability Assessments to its clients indicating “how your company’s sustainability performance compares with your peers and members of the prestigious Dow Jones Sustainability Indices.” The Dow Jones Sustainability Index, based on ESG scores, is produced by S&P and SAM.

S&P’s main rival in the ratings business is Moody’s, which has also made substantial investments into ESG. In 2021, Moody’s bought RMS, which produces climate risk modeling and analytics. Moody’s has not applied ESG ratings to municipalities to date, but last year Moody’s announced it would provide separate ESG criteria for countries that issue debt.

Critics question whether imposing ESG scores on issuers represents a conflict of interest for the agencies that paid billions in fines over conflicts and other improprieties leading up to the mortgage meltdown in 2008.

“They’re both determining the metrics and judging,” said Jack McPherrin, a research fellow at the Heartland Institute. “They’re also purchasing the research and the consulting that goes into determining what the actual risk factors are. There’s no independent process here.”

Utah officials also charged that ESG ratings are opaque and arbitrary.

“Russian energy giants Gazprom and Rosneft outscored American energy companies ExxonMobil and Chevron on S&P’s ESG scale,” they stated. “S&P also gave the Chinese state-owned China Petroleum & Chemical Corporation a higher ESG score than ExxonMobil and Chevron, despite human rights violations.”

“Each ratings company has their own set of metrics,” McPherrin said. “They all have different scoring systems. It’s a complete mess that’s designed to be confusing so that the people who are creating these metrics can manipulate the system however they want. It’s doubtful they really care that much about any specific metrics; they’re just using them to institutionalize a framework of control over the market.”

State officials are also concerned that the ESG ratings phenomenon could spread beyond municipalities to individuals.

“At one point we were talking about ESG scores just for companies and financial institutions,” Moore said. “Now they’re moving toward states and municipalities. I think this is going to filter down to a personal level eventually.”

Moody’s was contacted for this article but did not respond.

Kevin Stocklin is a writer, film director, and founder of Second Act Films, an independent production house specializing in educational media and feature films. Previously, he worked in international banking for more than a decade.

This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.