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Red state officials object to the imposition of a progressive social credit system
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Standard & Poor’s, the service that rates the creditworthiness of corporate and government borrowers, recently announced it would now use ESG (environmental, social, and governance) standards to evaluate states. This goes well beyond the traditional role of such services, which previously had been to rate borrowers strictly in terms of financial strength and the ability to avoid default.
Anyone paying attention to the Great Recession will remember that the ratings services, including S&P, weren’t up to the job of accurately determining the riskiness of investments such as mortgage-backed securities. You had one job, S&P, and when it counted most, you labeled as relatively safe the largest game of financial risk in human history. That failure nearly collapsed the global economy.
Understandably, many of us are skeptical about the idea of expanding S&P’s mission to include judging and scoring elected state governments. Creating such a scoring system can (and likely will) be weaponized against states that run afoul of current fads associated with “socially responsible investing.” High on that list is the issue of climate change, which plays a massive role in the ESG world. This is typically framed as risk management, but it looks suspiciously like political payback.
For example, states that produce a high proportion of fossil fuels get dinged for that in S&P’s ratings. But if the global-warming hypothesis is correct, won’t the most direct risk be faced by coastal states that could become Waterworld? Oil-producing but landlocked Oklahoma is at risk, but oceanfront states like New Jersey and Maryland are not? Such biased standards amount to political punishment, not risk management.
Bonds from energy-producing states will get a black mark against them, which will signal to banks and public pension plans and other politically minded financial institutions to screen them out of their portfolios, raising the price of borrowing and making it harder to fund projects.
Meanwhile, many states, especially red states, are raising objections. The treasurer for the state of Utah, Marlo Oaks, recently took to the editorial page of The Wall Street Journal to expose the capricious and arbitrary nature of this new role for ratings services, arguing correctly that handing out demerits to states that have a high concentration in the energy industry without similarly treating states that have high concentrations in other sectors shows that the issue is not lack of diversification but rather political disapproval of fossil fuels. The real goal of this “rating” system is to force progressive political policies on the states, using financial ratings as a club.
Rating the states on how they handle “political unrest stemming from … social issues” reveals that this really is politics, not finance, at work. Furthermore, the granting of higher ESG scores to state-owned Russian oil companies than to bonds from American states reveals that the purpose is not to evaluate but to cajole. Russia’s Gazprom is oblivious to the disapproval of America’s financial managerial class, whereas American states just might cave to such pressure. Then again … they might not.
Utah and Florida are fighting back against the corporate social responsibility agenda, and the State Financial Officers Foundation has also taken a leading role on the issue. This is an important moment for states to stand up to the ideological imposition on credit markets and specifically for the various state-level constitutional officials, including treasurers, controllers, and auditors, as well as public pension managers, to assert their constitutional powers and uphold their constitutional responsibilities to guard the budgetary and fiscal interests of their states.
As Christianity has been increasingly marginalized from public life, liberal ideologies have risen to replace it, offering a totalistic set of claims over all of life, centered in the state. One of the results is that national politics becomes everything, intruding into realms best left to other zones of authority: state and local government and institutions outside of politics such as financial markets.
At its root, the rapid rise of ESG ideology reflects this political reductionism. It is an imperial incursion of the state into another zone based on a failure to recognize the division of powers and responsibilities that arises from the Biblical idea of human fallenness. Thankfully, other authorities can resist this power grab, such as state-level officials as mentioned above, but also investors themselves in whose name these schemes are promoted. Investors stand to lose the most if the agencies that are supposed to help them weigh the risks of default without bias instead place political thumbs on the scale.
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