Republicans’ growing opposition to the ESG movement is targeting a corner of Wall Street less accustomed to controversy -- the credit rating companies.
S&P Global Inc. unveiled a scoring system for governments on categories like human rights, social integration and low-carbon strategies in March. Moody’s Corp. released its own scoring system, and Fitch Ratings Inc. in a May report said environmental, social and governance concerns factor into 7% of their U.S. public finance ratings.
Complaints quickly followed from Republican governors and treasurers, who said the companies have no business wading into an area that lawmakers see as politics, not finance. At stake could be some of the millions of dollars in fees paid by borrowers in the $4 trillion municipal market for ratings required by many institutional investors.
“We are leery of the whole ESG rating system for states,” South Carolina Treasurer Curtis Loftis, whose state received a ‘neutral’ grade in S&P’s new process, said in an interview. “We may be in perfect harmony with their goals and their methods, but they’re not going to order us, like children, to do what they’d like us to do.”
Growing Market
ESG-labeled bonds constitute a small but expanding part of the municipal market. Borrowers sold some $48 billion of such bonds in 2021, about 10% of all issuance and almost quadruple the share from five years earlier, according to Bloomberg data.
While Moody’s Investors Service, S&P Global Ratings and Fitch are the biggest credit assessors, some state officials say their ratings aren’t mandatory. Already, issuers increasingly are opting for a rating from just one of the companies, with single-rated sales totaling 28% of issuance year-to-date, up from 19% in 2008, according to a report from Municipal Market Analytics.
“We have the ability to go to companies that stand for the values that we believe in,” Arizona Treasurer Kimberly Yee said in a phone interview. “ESG policies and woke corporations are moving in a direction that I believe is dangerous.”
Yee added, “It’s a political scorecard, and not a financial scorecard.”
It’s relatively rare for municipalities to publicly criticize credit rating companies. In 2017, former Chicago Mayor Rahm Emanuel asked Moody’s to pull its rating on Chicago’s debt, saying that the company failed to recognize the steps he took to shore up the city’s finances.
Raters Respond
The rating companies maintain that ESG has long been part of their evaluation process, and the reports are an effort to make the data more transparent. Gregg Lemos-Stein, chief analytical officer at S&P, said the company incorporates ESG factors when it believes they are “relevant and material to creditworthiness.”