‘Woke Bond Rating? Muni Finance’s battle over ESG scores

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Update on public finances – May 17, 2022

Welcome to another edition of Road Fifty Public finance update! I’m Liz Farmer and this week I’m watching the latest ESG valuation wrangle assessing governments’ long-term environmental, social or governance risks. As always, send your comments and tips to: [email protected].

ESG assessment has always been a somewhat contentious issue in the investment community because data on these metrics is not standardized. But a recent move by S&P Global to assess states’ ESG exposure is sparking new debate, and conservative lawmakers and interest groups are fighting back in one of the most concerted efforts yet to discredit the practice.

In question, new ESG S&P credit indicators published at the end of March. Each state received a report card on its environmental, social and governance factors and was assigned a rating from 1 (positive) to 5 (very negative) for each factor. The states all generally scored two and three for each category. ESG credit indicators, S&P said in a recentFAQsprovide additional transparency on what is already integrated into our credit rating analysis.

Utah, for its part, is not buying it. In a scathing editorial in The Wall Street Journal this month, State Treasurer Marlo Oaks accused the agency of embracing leftist beliefs and blurring the line between subjective judgments and objective financial assessments.

In an email to Road FiftyOaks said categories such as a state’s scores for carbon management or political unrest resulting from community and social issues are open and subject to raters’ political beliefs.

In this iteration of the S&Ps ESG Indicators Bulletin, Utah was in the grip of drought, he wrote. A normal credit score takes into account the drought, as well as what the state is doing to alleviate the problem and how the drought factors into our overall score. The ESG report isolates the problem and paints Utah negatively because of it, painting a very different picture of Utah’s overall AAA credit rating. That in itself is problematic.

Pressure from the right

Oaks’ protest followed earlier pressure from conservatives and fossil fuel states against attempts to elevate ESG in financial disclosures. In April, Oaks, Utah Gov. Spencer Cox, and the state’s entire congressional delegation drafted what essentially amounts to an informal meeting. cease and desist letter to S&Pasking it to withdraw its misleading ESG indicators, potentially harmful to rated entities, or even illegal. Americans for Limited Government was quick to welcome officials’ opposition to what the group dubbed S&P’s woke bond rating.

S&P pointed out that its ESG indicators are not ratings or scores (it offers these types of services separately) and that the indicators do not alter the agencies’ credit rating criteria. It uses an alphanumeric system so investors can easily compare issuers from different sectors, but an ESG indicator cannot lead to credit improvement or deterioration.

Somewhere else,Texas and West Virginia Retirement Systems is cutting ties with investment funds and managers, such as BlackRock Inc., that prioritize ESG investing. The movements follow the model of politics created by theConservative American Legislative Exchange Council aimed at protecting[ing] retirees from politically motivated investment strategies.

On Capitol Hill, some Republicans are interested in ESG issues. U.S. Representative Chris Stewart of UtahTold Call recently that if the GOP took control of the House in the midterm elections, it would try to limit additional ESG regulations. It is possible that this thrust targets theSecurities commission and stock exchange regimes regulate business climate information.

Investors support ESG indicators

But the heightened focus on ESG data hasn’t started with the regulators that investors have been asking for for years. The argument of governments has generally been in favor of self-declaration. In the absence of standardized disclosures on things like carbon emissions or water conservation, private companies have stepped in to fill the void and come up with their own assessments.

If issuers had moved ahead of the disclosure request and provided the narrative about it, they could control the discussion a little more, said Lisa Washburn, managing director of Municipal Market Analytics. But they chose not to.

Matt Fabian, partner at MMA, said the S&P ESG indicators are part of a larger set of credit bureaus trying to extend the five or six year time frame they typically take to assess credit quality. credit of issuers and their ability to repay debt. A similar uproar occurred after the Great Recession when pensions took a beating and Moodys Investors Service began using its own calculations of pension liabilities to rate governments.

It is [S&Ps] try to look longer term at where a state is going to be in 30 years, Fabian said. ESG will tell you about the challenges they are currently facing that could make it more difficult for them in the long run to pay their obligations.

Divisions between rating agencies

Credit rating agencies have written about ESG in their market reports for years, and all four offer independent ESG analysis. But when it comes to credit ratings, which basically assess a bond issuer’s ability to repay, S&P (the largest rating agency for US public finances) has arguably gone the furthest in distinguishing fundamentals ESG in rating reports.

Following the outbreak in Utah, the rating agency Kroll Bond seems to want to distinguish itself when it comes to ESG assessment. Kroll is the only rating agency that does not rate Utah general obligation bonds. But in a report released last weekthe agency said that while ESG analysis is important, the rating of issuers on ESG factors often lacks objectivity.

We have wisely avoided including a separate ESG rating system in our credit rating methodologies and reports, the Kroll report says. In fact, we believe that ESG scores do market participants a disservice.

That’s it for this week’s edition of Public Finance Update. Well be back next month with another issue. Thanks for reading!