Recently, the states of Idaho and Utah, both controlled by the Republican Party, sent letters to S&P, one of the three major rating agencies, opposing the inclusion of ESG criteria in his assessment of the worthiness of their respective states (or any political subdivision).
Specifically, Idaho said “S&P has embraced a politicized rating system,” and Utah also called S&P’s “new focus on ESG a politicization of the rating process.” In particular, Idaho noted “[t]lack of transparent and objective criteria” and criticizes the “opaque evaluation system”, concluding that “these [ESG] ratings are a means of politically evaluating the decisions of states and their subdivisions. In essence, Idaho and Utah have criticized the inclusion of ESG criteria in a credit rating as a departure from the traditional focus on material financial issues in credit ratings (for example, whether a entity has the ability to pay interest on a bond), and as a back door way of imposing a political value judgment on the policy choices made by a particular state. As Utah noted in its letter, ESG issues “are not technocratic issues; they are normative issues. [and] [n]o the financial firm should substitute its political judgments for objective financial analysis.”
This type of critique of ESG – that it represents a departure from the sober financial analysis that was typically the sole focus of corporate America – has been voiced frequently as ESG criteria are increasingly adopted and that different entities are under pressure – whether from government, investors or the public – to integrate ESG criteria into decision-making. Indeed, this line of thinking has characterized most public statements by Republican SEC commissioners since the Biden administration announced it would enact mandatory climate disclosures as part of its regulatory agenda.
This chorus of criticism should only be expected to increase and, as these letters indicate, it is likely that this particular objection – essentially, that the imposition of these criteria will be ultra viresbeyond the scope of an entity’s authority – will be embraced by important state political actors who will not hesitate to use this legal argument when fighting federal government regulations.