Twenty-two state financial officers sent formal demand letters to Moody's, Fitch Ratings, and S&P Global this week asking the agencies to disclose the specific influence of environmental, social, and governance factors in credit ratings for U.S. states and municipalities. The officers claim ESG scoring frameworks appear to favor foreign sovereigns over domestic issuers in comparable fiscal positions, creating pricing distortions in the $4 trillion municipal bond market.
The letters cite recent rating actions where U.S. states with stronger debt-service coverage ratios received lower marks than foreign governments with weaker fiscal metrics but higher climate-transition scores. The treasurers stopped short of naming specific downgrades but referenced methodology changes Moody's implemented in October 2021 and S&P updated in March 2023, both of which formally integrated climate risk and energy-transition exposure into sovereign and sub-sovereign rating frameworks. The officers are asking for quantitative breakdowns: how many basis points of rating impact stem from governance versus environmental factors, and whether those weights differ between U.S. and non-U.S. issuers.
The timing matters because $387 billion in state and local government debt matures or reprices in the first half of 2025, according to Municipal Securities Rulemaking Board data through September. A one-notch downgrade on a AA-rated state general obligation bond typically adds 18 to 24 basis points to borrowing costs at current spreads, translating to millions in additional annual debt service for large issuers. If the agencies' ESG methodologies are opaque or inconsistently applied, state CFOs face budget uncertainty heading into spring refunding windows. The letters also arrive as Congress considers legislation that would require rating agencies to separate credit risk from policy-preference scoring, a bill that stalled in committee last year but has gained co-sponsors since municipal borrowing costs rose in 2023.
The three agencies now have forty-five days under the officers' request timeline to provide methodology documentation. If they decline or offer partial disclosures, the treasurers indicated they may coordinate on a formal complaint to the Securities and Exchange Commission under the Credit Rating Agency Reform Act, which requires transparent and consistent application of rating criteria. That path would trigger an SEC review process that typically takes six to nine months, but it would also create a public record of the agencies' ESG factor weights—a disclosure allocators have sought since the frameworks launched. Separately, at least four of the signatory states have begun requesting bids from smaller rating firms for upcoming bond issues, a move that could fragment the municipal rating landscape if dissatisfaction with the Big Three spreads.
Moody's, Fitch, and S&P have not yet responded publicly to the letters. The next visible pressure point is mid-December, when S&P is scheduled to release updated methodology guidance for U.S. local government ratings, a document the agency previewed in August but has not finalized.
The takeaway
Twenty-two state treasurers are forcing ESG methodology transparency from rating agencies ahead of a $387 billion municipal refinancing cycle in early 2025.
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