Utah fights back against politicized woke bond ratings

One of the most insidious initiatives from the left has been the insertion of political factors into investment criteria that govern the allocation of capital.  So-called "ESG" (environment, social, governance) criteria for judging the creditworthiness of securities have been embraced by credit rating agencies like Standard and Poors (S&P) in issuing ratings that determine the interest rates that bond issuers must pay when they seek to borrow funds.

Bond ratings are supposed to tell investors about the risk they face if they buy a bond, based on quantifiable information and objective factors.  Aside from the fact that ESG has nothing to do with the likelihood of interest and principal being repaid, it is an amorphous concept that has no commonly accepted measurable underpinning.  The only thing the rating is supposed to do is describe the risk of nonpayment.  Woke values have nothing to do with that calculation.

Fortunately, a pushback is beginning to come.  James Freeman of the Wall Street Journal cites Karen Pierog's report in the Bond Buyer on Utah's response to S&P's use of ESG to rate its bonds.  It should be noted that Utah enjoys a top credit rating.

Utah's top elected officials demanded on Thursday that S&P Global Ratings cease applying environmental, social, and governance factors to the state through the use of what they called a politicized rating system based on indeterminate factors.

A letter to S&P signed by Gov. Spencer Cox, Treasurer Marlo Oaks, other state constitutional officeholders, legislative leaders, and Utah's Congressional delegation, stated their objection "to any ESG ratings, ESG credit indicators, or any other ESG scoring system that calls out ESG factors separate from, in addition to, or apart from traditional credit ratings."

The letter states:

S&P acknowledges that "having a social mission and strong [environmental, social, and governance] characteristics does not necessarily correlate with strong creditworthiness and vice versa." S&P's ESG credit indicators politicize what should be a purely financial decision. This politicization has manifested itself in the capital markets where, for example, banks are pressured to cut off capital to the oil, gas, coal, and firearms industries. ESG is a political rating and should be characterized as such[.] ...

No financial firm should substitute its political judgments for objective financial analysis, especially on matters that are unrelated to the underlying businesses, assets, and cash flows it evaluates. This is especially true of a properly regulated independent entity like S&P that is charged with providing objective clarity and insight. The use of ESG-related quantitative metrics and analytical frameworks confounds the distinction between subjective normative judgments and objective financial assessments. It is therefore unconscionable for S&P to weigh in on indeterminate and normative questions[.] ...

While it may be difficult to deliver "forward looking opinion[s] about the capacity and willingness of an entity to meet its financial commitments as they come due," integrating this analysis with the political whims of the day is unacceptable. If they are not political, but are instead financially material, then they would be captured in the traditional credit analysis. ESG indicators are, therefore, not necessary.

So far, S&P has not responded.

Hat tip: Michael Nadler and David Kahn.

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