Dive Brief:
- A coalition of 23 Republican state attorneys general are probing Fitch Ratings, Moody’s Investors Service and S&P Global Ratings on their decisions to downgrade the credit ratings of companies in the fossil fuel industry, and whether they were based on ESG risk factors.
- The state AGs sent letters to the presidents of the three companies, as well as Securities and Exchange Commission Chair Paul Atkins last month, which questioned the legality of the ratings agencies’ ESG policies, according to an April 22 press release.
- The GOP AGs argue in the letter that the downgrading of credit ratings for fossil fuel companies “materially contravene” the ratings agencies’ stated methodologies, and that the “methodological failures are consistent with undisclosed material conflicts of interest.”
Dive Insight:
The letter is co-led by the AGs of Alaska, Florida, Nebraska and Texas. The states argued that by using ESG factors to help determine companies’ credit worthiness, the ratings agencies are “artificially increasing demand for their suite of ESG-related consulting services,” according to a release from Nebraska AG Mike Hilgers’ office.
The AGs also stated that the agencies’ participation in the United Nations-backed Principles for Responsible Investment also raises antitrust concerns for the states. The letter also notes that S&P and Moody’s were members of the now-disbanded Net-Zero Financial Service Providers Alliance. The alliance disbanded and concluded as a target-setting initiative in January.
The letter notes that the states have used similar legal theories of antitrust law “to collapse the Net Zero Insurance Alliance and the Net Zero Banking Alliance.” A similar theory of antitrust law was used to sue BlackRock, State Street and Vanguard for alleged antitrust violations, leading to a $29.5 million settlement from Vanguard and an agreement to withdraw from PRI and not rejoin any “climate-focused investment initiatives.”
“That settlement establishes a powerful precedent for actions against credit rating agencies engaged in similar coordinated ESG conduct,” the April 22 letter said. “The undersigned attorneys general are evaluating whether the Ratings Agencies’ coordinated ESG adoption warrants similar antitrust scrutiny.”
The AGs allege that the downgrades of fossil fuel companies’ credit ratings were based on assumptions that have not come to pass. The letter said the agencies incorrectly predicted that governments would enact stricter net-zero policies; when fossil fuel use would peak; that renewables would take over the fossil fuel market share; and an increase in ESG investment mandates.
Attorneys general from Alabama, Arkansas, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, North Dakota, Ohio, Oklahoma, South Carolina, Utah, West Virginia and Wyoming also signed the letter.
The letter requests that the ratings agencies explain why certain fossil fuel companies and states were given downgraded credit ratings within 90 days; withdraw from PRI or disclose their commitments within 60 days; revise any sector-specific methodologies; and answer a list of questions on their ESG-related considerations and methodologies within 45 days. The letter also requests the agencies stop “offering ESG advisory and consulting services to entities whose credit ratings the agency also determines” or disclose its dual relationship to the SEC.
