State AGs Call for SEC Scrutiny of Credit Rating Agencies Over ESG Practices
Republican state attorneys general demand SEC review of Moody’s, Fitch, and S&P over ESG-related credit rating concerns.
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Republican state attorneys general are urging federal regulators to investigate Moody’s, Fitch Ratings, and S&P Global Ratings over allegations that they continue to use questionable climate assumptions in their credit ratings. The Montana-led coalition has sent a letter to the Securities and Exchange Commission (SEC)’s Office of Credit Ratings, raising concerns about how the agencies incorporate environmental, social, and governance (ESG) factors in their assessments.
Focus on Climate Scenarios and ESG Impact
The letter, obtained by the Daily Caller News Foundation, highlights the use of RCP 8.5, a high-emissions climate scenario, by Moody’s in its August report on how heat and water stress could affect businesses and financial institutions. The attorneys general argue that this scenario is no longer plausible under current emissions trends and that its continued use undermines the credibility of the ratings.
Moody’s has stated that RCP 8.5 is one of several modeled pathways used to estimate future physical climate risks, and that its analysis also considered the lower-emissions RCP 4.5 scenario. However, the coalition argues that the use of the retracted 2024 Nature paper, which formed the basis of some of Moody’s economic loss estimates, further compromises the reliability of its findings.
Call for Transparency and Methodology
The coalition is demanding that the agencies explain or reverse credit ratings influenced by ESG considerations, publish sector-specific methodologies, and disclose or eliminate conflicts of interest related to ESG consulting. The SEC’s Office of Credit Ratings oversees these agencies and ensures compliance with federal rules governing methodologies and conflicts of interest.
Jason Isaac, CEO of the American Energy Institute, criticized the reliance on implausible climate scenarios and retracted studies, stating that such practices undermine investor trust and increase the cost of capital for American energy producers. Will Hild, executive director of Consumers’ Research, echoed these concerns, accusing the agencies of ignoring previous calls to remove ESG-driven metrics from their business practices.
Implications for Financial Markets
Credit ratings play a critical role in financial markets, as they influence borrowing costs and investor confidence. The coalition is concerned that the agencies’ ESG-driven assessments may not accurately reflect financial realities, potentially leading to misinformed investment decisions. The issue highlights growing tensions between ESG considerations and traditional financial analysis, as regulators and industry leaders seek clarity on how to balance sustainability goals with economic accuracy.
Source: Daily Caller
