S&P eliminates ESG scores from credit ratings

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and corporate governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

In the states

State treasurers question independence of BlackRock board members

Daily Mail reported on August 8 that fifteen state treasurers, with the aid of the State Financial Officers Foundation—a nonprofit group that says its “mission is to drive fiscally sound public policy” among state treasurers and other financial officials—sent a letter to BlackRock suggesting that the company’s board members might have conflicts of interest that could interfere with their ability to make decisions that benefit shareholders:

Fifteen Republican state finance chiefs are probing whether directors of BlackRock mutual funds are sufficiently independent of the giant asset manager, questioning their investment moves on China, coal, and climate change.

The group has raised concerns in a letter about the governance of mutual funds as part of a broader push against the growing clout of environmental, social and governance (ESG) values in business.

Their letter, dated August 2 and obtained by DailyMail.com this week, was addressed to ten members of BlackRock’s Fixed-Income Board of Directors, which oversees the group’s closed-end mutual funds.

BlackRock says board members act in the best interests of all fund shareholders. 

‘We are concerned about whether your board is sufficiently independent to supervise BlackRock’s performance as an investment adviser,’ says the letter.

‘Most of you are either employed by BlackRock or hold additional positions as board members of publicly traded companies in which BlackRock owns a sizeable share.’

The GOP letter says ‘these personal entanglements’ could ‘easily impair a director’s ability to exercise independent judgment when reviewing possible misconduct by BlackRock.’

The financial officers raise concerns about investment choices ‘in response to outside pressure from large institutional clients’ that help fight climate change but don’t make investors richer.

Fund managers pulled out of coal, which causes more carbon pollution than other energy sources, meaning investors missed out on an ‘enormous rise in share prices within the coal industry,’ the letter says.

Meanwhile, BlackRock has ‘poured billions of dollars into China’ as the first foreign firm allowed to operate there, even though this created ‘potential financial risks to its clients,’ the letter said.

This also hurt the ‘national security interests of the US and other democracies,’ says the letter. …

The document follows up on last month’s letter from 15 Republican state attorneys general to the same directors, asking about financial relationships that could undermine their independence. …

Derek Kreifels, CEO of the State Financial Officers Foundation, said the letter highlights ‘troubling conflicts’ between BlackRock and its ‘supposedly independent’ board.

‘There is no way of knowing if BlackRock is acting in the best interest of the shareholders or pushing a political agenda,’ Kreifels said in a statement.

Will Hild, director of Consumers’ Research, a non-profit, said the ‘ESG scam’ was out of control.

‘The fact that BlackRock isn’t even following their own rules shows you how corrupt these ESG extremists really are,’ said Hild.

Wall Street trade group sues Missouri over rules opposing ESG in private investments

The Securities Industry and Financial Markets Association (SIFMA) is suing the state of Missouri over its recently enacted rules requiring the disclosure of ESG considerations to private investors. SIFMA claims the state has overstepped its authority:

A top U.S. trade group for financial firms filed a lawsuit accusing Missouri of “overstepping its boundaries” after the state passed a rule to curb the impact of environmental, social and governance (ESG) factors in investment decisions.

Under the new rule, broker-dealers in Missouri would be required to obtain consent from customers to purchase or sell an investment product based on social or other non-financial objectives, such as combating climate change.

The Securities Industry and Financial Markets Association (SIFMA), which represents banks, asset managers and broker dealers, said on Thursday the rule was in conflict with federal securities laws, which advocate a uniform regulatory regime across the country.

“The rules fail to acknowledge that federal law, regulations, and applicable rules already require financial advisors to act in the best interest of their clients when providing personalized investment advice,” SIFMA said in its lawsuit.

The lawsuit, filed against Missouri Secretary of State John Ashcroft and Securities Commissioner Douglas Jacoby, marks one of the biggest challenges to a Republican-led backlash that has engulfed major Wall Street firms such as BlackRock (BLK.N) and Wells Fargo (WFC.N).

The rule is not in conflict with the federal securities laws as SIFMA decries, Ashcroft said in a statement.

“The rule implements client disclosure standards pertaining to security investments and how investment advisors and broker-dealers disclose investment strategies that propagate values-based agendas that are not purely focused on generating profit for their clients,” Ashcroft added.

On Wall Street and in the private sector

S&P eliminates ESG scores from credit ratings

S&P Global has decided to eliminate the numerical ESG score from its credit ratings in response to investor concerns:

S&P Global Inc. will no longer publish ESG scores along with its credit ratings, as the company adjusts its approach in response to investor feedback.

The update, which took place on Aug. 4, was triggered by expressions of confusion from investors who use S&P’s corporate credit ratings, according to a person close to the process who asked not to be identified discussing feedback that hasn’t been made public.

A spokesperson for S&P referred to a statement, in which the company said the “update 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 development comes as ratings providers try to navigate a changing landscape in which there’s little consensus on how to assess the long-term financial impact of environmental, social and governance factors on issuers.

S&P had sought to address such concerns a few years back by adding an alphanumerical scale intended to enhance its text descriptions of an issuer’s ESG credentials. That decision met with enough investor resistance to merit scrapping the alphanumerical model and instead publishing only text descriptions, the person said….

S&P’s efforts to introduce an ESG scale to inform its debt ratings weren’t universally understood by investors, the person familiar with the process said.

ESG scoring frameworks within credit ratings don’t work, according to Patrick Welch, chief ESG and ratings policy officer at Kroll Bond Rating Agency, a smaller rival of S&P.

With a 1-to-5 scale “you’re putting one scoring system – an ESG one – inside another scoring system, which is the credit rating,” Welch said in an interview. “It raises confusion – are you talking about financial risk to the company, or also its impact” on society and the environment?

Opponents of ESG generally supported S&P’s move:

Rep. Andy Barr, R-Ky., tweeted on Wednesday that “ESG ratings distort the free market. Lending decisions should be made based on creditworthiness, not the political preferences of the Left and Wall Street elitists.”

Similarly, Sen. Mike Braun, R.-Ind., said on Wednesday on the the social media platform: “ESG is designed to tank your hard-earned retirement savings to support radical woke agendas. Fiduciaries should be concerned with maximizing return on investment before anything else.”

Jimmy Patronis, chief financial officer of the State of Florida, which has been a focal point of the anti-ESG movement led by Republican Gov. Ron DeSantis, tweeted on Tuesday: “There was a real risk that these debt ratings agencies were going to shove ESG down states’ throats. The threat was real: adapt ESG criteria in your investment decisions or we’re downgrading you. The S&P abandoning this woke-virus helps removes that threat. Huge victory.” …

[David] Bahnsen said the other rating agencies that were “bullied” into using ESG scores in their credit rating methodology now have a choice. “Allow S&P to be the only credit rating agency that is really rating credit, and suffer the fallout competitively, or follow suit and return to the job they signed up for,” he said.

But not all opponents feel that the decision marks progress for the ESG pushback movement. Steve Soukup, an ESG opponent and the author of The Dictatorship of Woke Capital told Ballotpedia that S&P’s ESG score, in his view, “was a disaster from the beginning and that the company’s removal of the score was a nod to reality.” He continued, saying, “The scores were never especially useful, and their removal will hardly be noticed.” He said he considered the quantitative scores to be “a meaningless gesture in the first place” and that “their removal was equally meaningless.”

McDonald’s and other companies respond to pushback against ESG initiatives

The Conference Board, a global nonprofit business organization, reported recently that ESG pushback has become a concern for many business executives:

Nearly half of the firms surveyed by the Conference Board recently said they have experienced some level of backlash against their ESG-related initiatives.

Among those companies, those in the financial and insurance services industries have been affected the most, with 37% of that sector saying they have experienced some level of backlash over environmental, social and governance initiatives. The next highest was business and professional services, with 8% of respondents in that sector saying there had been some backlash.

A report on the survey results authored by Andrew Jones, senior researcher, ESG center, at the Conference Board, said most of the backlash has been centered primarily on the social and environmental components of ESG, with the backlash being particularly emotionally charged when companies take public stances on social issues.

Bloomberg reported on August 11 that McDonald’s had recently removed a number of ESG references from its website, potentially in response to criticism:

McDonald’s Corp. quietly removed the term “ESG” from some parts of its website at a time when environmental, social and governance initiatives have been attracting criticism from some conservative policymakers in the US.

The fast-food chain’s “Purpose & Impact” website recently removed several mentions of ESG, according to an analysis by Bloomberg News. One web page that was titled “ESG Approach & Progress” is now labeled “Our Approach & Progress.” Most of the other text remains similar.

Another web page, previously titled “Performance & ESG Reporting,” now shows up as “Goal Performance & Reporting.” In some instances, McDonald’s subbed the phrase “environmental and social issues” for the ESG abbreviation. …

McDonald’s declined to comment on the changes but affirmed its commitment to reporting annually on its progress on social and environmental goals. The chain released one such update earlier this month.

Meanwhile, Matt Cole, the CEO and CIO at Strive—the asset management firm co-founded by ESG opponent and presidential candidate Vivek Ramaswamy—suggested that McDonald’s efforts to distance itself from ESG may be due to engagement efforts by investors and asset managers. Cole said that such decisions are often superficial:

Less than one month after Strive’s public engagement with McDonalds … they scrub ESG from their website. Great job by Justin Danhof and the Strive Corporate Governance team in shining a light on companies breaching their fiduciary duties. But it’s important to remember that while the term ESG is quickly going away, the underlying problem still exists. Similar to McDonalds; Blackrock, Coca-Cola and others have been quietly removing the word ESG but all are still committed to the real problem: stakeholder capitalism. We are just getting warmed up in the fight of shareholder capitalism vs stakeholder capitalism.