Red States Applaud Cancellation of ESG Scores

Credit rating agency S&P says it will end ESG scoring, continue ESG ‘narratives’

The S&P Global logo is displayed on its offices in New York City, on Dec. 13, 2018/File Photo

Some states that had for the past year been subjected to environmental and social credit scores are shedding no tears as Standard & Poor’s (S&P), one of the world’s largest credit rating agencies, announced last week it would no longer include environmental, social, and governance (ESG) scores in its credit ratings.

ESG scores have been used by several rating agencies, including S&P, Moody’s, and Morningstar, to measure compliance with progressive criteria such as reducing fossil fuels and supporting racial and gender equity. In addition, organizations like the Human Rights Campaign (HRC) rate companies regarding their support for LGBTQ issues in their Corporate Equality Index. 

In 2022, S&P expanded its ESG scoring to include cities, states, and countries as well, drawing ire from several U.S. states, and raising fears that personal social credit scores could follow. At that time, Utah state treasurer Marlo Oaks, together with Utah’s governor, attorney general, congressional representatives, constitutional officers, and state legislative leaders, sent a letter to S&P demanding an end to the practice.

Regarding S&P’s reversal last week, Mr. Oaks told The Epoch Times that “the rating agency has indicated that it is ceasing to include ESG indicators in its reports, which should include states. We will see how the change is implemented.”

On Aug. 4, S&P stated that while the firm will continue to provide “narrative” information about companies’ ESG practices, it will no longer calculate numerical ESG scores, which had been included in a borrower’s overall credit rating. 

“S&P Global Ratings remains committed to providing the market with transparency on how and when environmental, social, and governance (ESG) factors influence our assessment of creditworthiness,” S&P stated in an official release. 

“However, effective immediately, we are no longer publishing new ESG credit indicators in our reports or updating outstanding ESG credit indicators,” the rating agency stated. “We have determined that the dedicated analytical narrative paragraphs in our credit rating reports are most effective at providing detail and transparency on ESG credit factors material to our rating analysis.”

Some industry experts say that S&P’s retreat from ESG is due to pressure from Republicans in state legislatures, state attorneys general offices, and more recently in Congress. 

Tom Lyon, a University of Michigan business school professor, told the Financial Times that S&P’s withdrawal from ESG scoring was “just the latest example of a company crumpling in the face of these Republican attacks.”

West Virginia has been another state to lead the charge against the ESG industry.

“I’m grateful S&P Global has responded to our calls to ditch these subjective, politically motivated ESG ratings scores and instead go back to relying on more solid, objective financial metrics in their analyses,” West Virginia state treasurer Riley Moore told The Epoch Times. “The ESG movement has been outed as a scam being perpetrated by global elites to implement their radical social agendas, and this is a clear victory in our fight to stop it.”

“This ratings scheme was poised to be the first step in a slippery slope toward placing ESG scores on all citizens, threatening their financial security if they did not fall in line with the woke agenda,” Mr. Moore said. “The fact that S&P Global has stepped back provides hope for a return to financial sanity in America.”

Is ESG a Measure of Financial Health?

In addition to ESG scores, S&P, creator of the benchmark S&P 500 Index, also launched the S&P 500 ESG Index in April 2019. This index is “designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry group weights as the S&P 500.”

An S&P analyst reported in January that “from its launch date until the end of 2022, the ESG index outperformed its benchmark, the S&P 500, by a cumulative 9.16 percent.” 

ESG criteria often underweight so-called “brown” companies like oil and gas producers in favor of “green” low-emitting companies like finance and tech. This strategy proved successful during the COVID-19 pandemic, when lockdowns caused the share prices of energy companies to plummet, but led to significant underperformance when those share prices rebounded sharply in 2021.

Lori Heinel, chief investment officer for State Street Global Advisors, stated in December 2022: “I have no evidence that [ESG] is good for returns in any time frame. In fact, we’ve seen the evidence to be quite contrary. 

“Last year, if you didn’t own energy companies, you did miserably compared to broad benchmarks,” Ms. Heinel said. “The year before, that was quite the opposite ... but that was just a happenstance, that’s not because it’s a good investment.”

ESG credit scores have been criticized for being political and arbitrary, and for having little to do with a borrower’s actual creditworthiness. For these reasons and others, many who were once outspoken advocates for ESG are now backpedaling.

S&P’s reversal “is much like what we saw with Larry Fink at the Aspen Ideas Festival,” Will Hild, executive director of Consumers’ Research, told The Epoch Times, referring to Mr. Fink’s statement in June that he would no longer use the term ESG. 

“I think he’s basically saying what everyone knows, which is that ESG has become a toxic term, because of the ramifications of what they’re doing and the intent behind it,” Mr. Hild said. “And so a lot of companies are walking back from ESG, at least in name. Obviously, S&P is going a little farther than that; they’re going to actually start killing their [ESG] ratings.”

ESG Discrepancies

Credit ratings, which typically range from the highest “risk-free” rating of AAA to a D, or default rating, are intended to indicate a borrower’s ability to repay debt, and they are a key factor in determining the interest rate on loans and bonds. The “big three” debt rating agencies—S&P, Moody’s, and Fitch—date back to the early 1900s. 

The addition of ESG criteria to credit ratings has become the trend over the past decade, and many companies that issue ESG ratings also offer consulting services to help borrower’s boost their ESG scores. Some borrowers, however, objected that they had excellent financial health and payment history, but had their credit rating reduced because of opaque, non-financial criteria. 

“S&P Global assigned (and later retracted) Russian-controlled energy producers higher ESG ratings than similar entities in the United States,” Mr. Oaks said. “Russian energy giants Gazprom and Rosneft outscored American energy companies ExxonMobil and Chevron, despite the fact the Russian government is the majority owner of Gazprom and owns a 40 percent stake in Rosneft—the same government that invaded neighboring Ukraine in an unprovoked and unjustifiable attack, in violation of international law.

“Any investor who relied on S&P Global’s ESG ratings was left to wonder whether those ratings accurately captured the actual ‘social’ risk attributable to the Russian government’s longstanding and documented disregard for human rights and international law,” he said.

Even between similar companies, there could be wide discrepancies in ESG scores. For example, S&P rated Conoco, an oil and gas production company, at a relatively high 68 on a scale of 100 on ESG, but rated its competitor ExxonMobil at 31.

“It speaks to the ludicrousness of ESG,” Mr. Hild said. “The criteria themselves are so vague and obscure and obtuse, as to basically be meaningless and useless. And usually what ESG scores really translate into is how aligned is the company with what the ratings agency thinks they ought to be doing politically.” 

General Motors (GM), America’s largest auto manufacturer, received an ESG score of 67 from S&P, while Tesla, which makes electric vehicles (EVs) exclusively, received a 37. GM has publicly committed to transitioning its auto production to EVs in the coming decade. 

Tesla, founded by billionaire entrepreneur Elon Musk, scored a 60 in S&P’s environmental category, but was brought down by an exceedingly low social score of 20. In addition to founding Tesla, Mr. Musk also acquired Twitter, a social-media chat platform.

“Elon Musk has obviously been raising a lot of peoples’ hackles by his activity with Twitter, and with the Twitter files and his free speech activity,” Mr. Hild said. “And then you’ve got a company like GM that basically says, ‘We‘ll go along to get along; we’ll play along with with all your political desires.’ I think that’s really what speaks to the difference in those ESG scores.”

Only a First Step

S&P said that ESG scores “were intended to illustrate and summarize the relevance of ESG credit factors on our rating analysis through the use of an alphanumerical scale.” 

The decision to stop producing ESG scores “does not affect our ESG principles criteria or our research and commentary on ESG-related topics, including the influence that ESG factors can have on creditworthiness,” the company said. 

But critics of ESG argue that any essential factors that determine a company’s ability to repay its debt should simply be part of its overall credit rating, as was the practice before ESG scoring took hold.

“If a factor is truly financially material, it belongs in the credit rating where it has always been, not called out in a separate political score,” Mr. Oaks said. 

Despite S&P’s reversal, however, many say the conflict over social credit scoring is far from over. 

“It’s a big change, to stop issuing these scores,” Mr. Hild said. “It’s not the whole ball game, it’s certainly not the war, but it is an important step in the right direction.”