A coalition of 19 Democratic state attorneys general has urged the US Securities and Exchange Commission (SEC) to reject calls for investigations into Moody's, S&P Global Ratings and Fitch, arguing that political pressure on credit-rating methodologies threatens the independence of financial risk analysis.

The 27 August letter is a direct response to a campaign launched in April by 23 Republican attorneys general, who accused the agencies of using ESG considerations to justify downgrades of fossil fuel companies and energy-producing states. But the significance of the latest intervention extends beyond climate politics. It reflects a growing battle over who gets to define and assess financial risk in capital markets.

As Minerva noted in April, Republican attorneys general broadened anti-ESG efforts by targeting credit ratings agencies rather than investors, asset managers or proxy advisers. Their letter demanded explanations for alleged ESG-driven ratings decisions and raised the prospect of enforcement actions, antitrust investigations and SEC involvement.

The Democratic coalition, led by New York Attorney General Letitia James and joined by counterparts from states including California, Illinois, Massachusetts and Washington, has now pushed back forcefully. The group argues that climate and energy transition risks can be financially material and therefore fall within the legitimate scope of credit analysis. More importantly, it contends that political officials should not seek to dictate how ratings agencies incorporate evidence-based risks into their methodologies.

The real issue: who controls risk assessment?

The most important question raised by the exchange is not whether climate change should influence credit ratings, but whether political actors should influence the methodologies used to assess risk.

Credit ratings agencies occupy a distinctive position in financial markets. Their assessments affect borrowing costs, access to capital and, in some cases, regulatory treatment. Because ratings play such a central role in market functioning, confidence in their independence is critical. Perceptions that methodologies are being altered in response to political pressure, whether from supporters or opponents of ESG, could undermine the credibility on which ratings depend.

The Democratic attorneys general argue that the Republican coalition is effectively seeking to pressure ratings agencies into changing methodologies or revisiting ratings outcomes that some state officials disagree with. They maintain that ratings should reflect analysts' judgments about material risks rather than political preferences.

The letter also highlights the Credit Rating Agency Reform Act of 2006, which limits the ability of federal, state and local authorities to regulate the substance of credit ratings or the methodologies used to produce them. While the law does not shield agencies from scrutiny, it reflects a longstanding principle that governments should not directly dictate how credit risk is assessed.

A broader struggle over market governance

For investors, the dispute is best understood as part of a wider debate over the governance of financial markets rather than a standalone ESG controversy.

Republican-led states have spent several years challenging the activities of asset managers, climate-focused investor coalitions, proxy advisers and sustainability initiatives. The April letter suggested that those efforts had expanded from stewardship and disclosure into the core mechanisms used to evaluate financial risk.

The Democratic response demonstrates that the debate is becoming increasingly bilateral. Competing coalitions of state officials are now advancing conflicting views about what constitutes legitimate financial analysis and where the boundaries of government intervention should lie.

What to watch next

The immediate likelihood of ratings agencies materially changing their treatment of climate-related risks appears low. Any significant methodological shift would have implications not only for US political debates but also for global market credibility, regulatory oversight and investor confidence.

The more significant development is the increasing politicisation of market intermediaries. As elected officials seek to influence how risk is identified, measured and communicated, ratings agencies are finding themselves drawn into a broader contest over the rules that govern financial markets.

The significance of the dispute is therefore less about whether climate risk should be considered and more about who controls the process of assessing material financial risks. For ratings agencies, the challenge is increasingly to defend methodological independence as political scrutiny moves deeper into the mechanics of financial markets.