Republican AGs target ESG-driven rating agency downgrades

Republican attorneys general from 23 states are questioning rating agencies' use of environmental, social, and governance factors that they contend led to downgrades for fossil fuel companies and weigh on ratings for states and local governments that collect fossil fuel production-related revenue.

And they're threatening legal consequences if the agencies don't change their tune.

A lengthy April 22 letter to Fitch Ratings, Moody's Ratings, S&P Global Ratings, and top Securities and Exchange Commission officials accused the agencies 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." It also noted ripple effects that reduce fossil fuel production and related government revenue.

"These downgrades were based on speculative ESG assumptions that never materialized," Oklahoma Attorney General Gentner Drummond said in a statement on Tuesday. "These agencies strayed from their own methodologies in downgrading, or threatening to downgrade, states and municipalities with fossil fuel production revenues, which is why I am stepping in to demand answers."

Oklahoma, which collects an oil and gas gross production tax, has received one-notch upgrades from all three rating agencies since 2024. When Fitch lifted Oklahoma's issuer rating to AA-plus in March, it noted "the state's still sizable concentration in natural resource development industries, which constrains longer-term revenue growth prospects and contributes to elevated revenue volatility."

The attorneys general's letter cited four state outlook revisions to negative from stable that occurred in 2019 and 2021, as well as ESG/fossil fuel-related concerns raised in more recent state rating reports.

"Given the increasing demand for fossil fuels, together with the continued transition of federal policy in favor of fossil-fuel production, a state economy's connection to fossil fuels should contribute to a positive financial outlook by any objective measure," the letter said. "Yet the ratings agencies continue to characterize those connections as a negative, increasing states' cost of credit."

The three rating agencies were presented with a list of requested actions to take and questions to answer, including giving them 90 days to provide a written explanation of the non-ESG financial basis for each downgrade of a fossil fuel company or state or to reverse all ESG-driven downgrades.

Failure to comply may bring a variety of consequences, including enforcement actions under state unfair or deceptive acts or practices laws, antitrust investigations, or referral to federal authorities, the letter said.

S&P said in a statement it was aware of the letter, adding "we take these matters very seriously and do not have further comments at this time."

A Moody's spokesperson said: "We are reviewing the letter from the attorneys general and will engage with it through the appropriate channels."

Fitch did not immediately respond to a request for comment.

Kim Olsan, senior fixed income portfolio manager, told The Bond Buyer during an interview for an article on pricing changes in response to wildfires, that investors would like the rating agencies to provide deeper guidance related to the impact of increasing costs from natural disasters.

Olsan said Tuesday her takeaway from reviewing the first few pages of the AGs' letter was that "the states would like a uniformity of ratings criteria applied, and believe that was not accomplished related to ESG/fossil fuel parameters."

She added that whether on the sell side as a trader, or buy side as an investor, the metrics that are stated as relevant to an assigned rating need to be relied on in a consistent manner.

"Shifting underlying economic conditions and changes in practice" would be some of the criteria expected to impact any ratings changes, she said.

"Published ratings are a key source of information, but other data related to items such as financials and environmental factors also play a role in credit evaluations," Olsan said.

Republican officials have previously targeted rating agency use of ESG factors. S&P was singled out in 2022 by state attorneys general and treasurers after it released an ESG credit indicator report card for all 50 states.

In 2023, 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.