Led by Montana Attorney General Austin Knudsen, a group of 22 Republican attorneys general has requested that the SEC investigate Moody's, Fitch, and S&P Global Ratings. The officials allege that these agencies use speculative environmental, social, and governance (ESG) metrics that could unfairly increase borrowing costs for fossil fuel-dependent states and industries.

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The $41 trillion estimate built on retracted data

Moody's Corporation's prominent $41 trillion estimate of U.S. GDP losses is at the center of a growing controversy. according to the report,this figure relies on a climate paper that was previously withdrawn due to significant errors. Furthermore,the estimate utilizes the Representative Concentration Pathway 8.5 (RCP 8.5) scenario, an extreme climate model that had been abandoned by many scientists due to its implausibility.

The reliance on these models extends to the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). As the report notes, the NGFS used the retracted study as the foundation for its widely used Phase 5 damages model, which in turn informs the massive economic loss projections used by major financial institutions. This chain of data, according to the attorneys general, creates a feedback loop of speculative and potentially inaccurate financial risk assessments.

How ESG predictions impact fossil fuel borrowing costs

A coalition of 22 Republican attorneys general, including officials from Texas, West Virginia, and Wyoming, argues that these ESG-driven ratings create a financial penalty for energy-producing regions. The group includes representatives from Alabama, Arkansas, Florida, Georgia, Idaho, Iowa, Indiana, Kansas, Kentucky, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Utah, and Wyoming. These officials contend that by incorporating speculative environmental predictions, agencies like Fitch Ratings, Inc. and S&P Global Ratings may be artificially lowering credit scores for fossil fuel companies and municipalities.

The economic impact of these ratings could be profound for fossil fuel-dependent industries. The attorneys general argue that when agencies issue downgrades based on these models, they directly increase the cost of capital. By making bonds less attractive to investors, these ESG-influenced decisions can drive up borrowing costs for energy producers and the states that rely on energy revenue to fund public services. The coalition argues that these speculative models create a systemic disadvantage for regions like the Gulf Coast or the Mountain West.

Moody's, Fitch, and S&P face scrutiny over methodology

The core of the legal demand rests on whether these agencies are adhering to their own established rules. The attorneys general allege that the continued use of these ESG predictions is consistent with undisclosed material conflicts of interest. They argue that by incorporating speculative climate scenarios into credit decisions, the agencies are undermining the very integrity of the ratings that investors rely upon to navigate the markets.

Will the SEC's Office of Credit Ratings launch a probe?

Despite the scale of the demand, several critical questions remain unanswered. It is currently unknown whether the SEC's Office of Credit Ratings will formally open an investigation into the practices of Moody's, Fitch, and S&P. Furthermore, the three major rating agencies have not yet issued a public response to the specific allegations regarding the use of the RCP 8.5 scenario and retracted research. The ultimate decision by the SEC will determine if these ESG methodologies will face a fundamental regulatory overhaul.