The Red State AG Attack on ESG Continues to Misfire

On August 24, sixteen Republican state attorneys general (AGs) sent a 38-page letter to the chief executives of Deloitte, EY, KPMG and PwC, copying the SEC’s Chairman and its Director of Enforcement. The AGs allege that the firms compromised their professional independence by publicly supporting climate-related disclosure, and end with thirty-eight demands for documents.

We come at this from opposite political directions and agree on the following. This letter continues the effort to pressure participants across the financial markets to ignore the potential financial implications of climate risks. Like the July 2025 State Financial Officers Foundation’s letter to asset managers regarding ESG, to which we responded in Here We Go Again: Red States Continue to Focus on ESG, it sets a dangerous precedent for all sides.  In this shot at accounting firms, the AGs ask the wrong questions, misunderstand the standards that purportedly support their claims, and insinuate conflicts with no factual evidence. Regardless of one’s views on climate disclosure, targeting groups of professionals in this manner can distort the functioning of free markets and have unintended consequences. Indeed, once unleashed, misfires can ricochet.

The Independence Theory Rests on Material Misconceptions

In questioning the auditors’ independence and commitment to materiality, the letter itself omits critical information and rests on material misconceptions of fact.

The International Sustainability Standards Board (ISSB) has issued two standards with a clear objective: to meet capital-market demand for additional information about climate- and sustainability-related risks and opportunities that could reasonably be expected to affect a company’s prospects—information capital markets rely on. IFRS S1 sets the general requirements and explains that objective. IFRS S2 is the climate standard, and it addresses the details the AGs object to: greenhouse gas emissions, time horizons, and projections into the future. The AGs’ letter attacks the climate standard throughout yet does not cite it. The central charge of the AGs’ letter is that the framework demands speculation over an undefined period. Paragraph 30 of S1 and Paragraph 10 of S2 requires a company to define its own short, medium, and long term, and to explain how those definitions track the planning horizons it already uses for strategic decisions. The horizons are the company’s, disclosed and explained.

The AGs also omit the well-established role of market-driven information flows in the capital markets, something the SEC itself has identified as an appropriate space for communication of information investors may seek.

The AGs Refute Their Own Benchmark

The AGs accurately cite the Financial Accounting Standards Board (FASB) as its measure of proper accounting. They quote Concepts Statement No. 8 on materiality. They quote FASB on neutrality—information presented without bias, not slanted, weighted, emphasized, de-emphasized, or otherwise manipulated. They quote FASB on freedom from error. They quote FASB’s definition of who financial reporting serves: existing and potential investors, lenders, and other creditors.

Then they condemn the ISSB for adopting the same concepts. IFRS S1 requires fair presentation through a complete, neutral, and accurate depiction, and its Appendix D states that these qualitative characteristics come from the conceptual framework that FASB’s own formulation mirrors. Its definition of primary users—existing and potential investors, lenders and other creditors—is FASB’s language, not a dilution of it. The AGs cite the formulation approvingly on one page and treat it as evidence of capture a few pages later.

The same reversal occurs on materiality. The AGs correctly quote PCAOB standards for the proposition that materiality is determined issuer by issuer: management decides, the auditor tests whether the evidence supports that judgment, and outsiders do not make the call. The AGs then determine, from the outside of each of these companies, that an entire category of information is immaterial for public companies as a class. That is not a materiality determination. It is the elimination of one.

The Conflicts Theory Asks the Wrong Question

The AGs’ second charge is that the firms profit from the disclosure they support. Suppose that is true. The question that decides whether it matters is one they do not ask: whose client? A firm selling emissions-inventory work or scenario analysis to a company it does not audit raises no independence question at all, as there is no attest relationship to impair. That work is performed today by engineering firms, environmental consultancies, and software vendors, none of them subject to any rule the letter invokes.

A firm selling that work to an audit client is already governed, and not vaguely. Regulation S-X prohibits ten categories of non-audit service to an audit client outright, among them appraisal and valuation, actuarial services, internal audit outsourcing and management functions. Everything not prohibited requires audit committee pre-approval, and the fees are then disclosed publicly by category in the issuer’s proxy statement. This is the architecture Congress built after Enron, designed for precisely the problem the letter describes.

The AGs cite three SEC enforcement actions involving Deloitte, PwC and KPMG as evidence. Each one is an application of that architecture. Having produced them, they ignore the framework they come from. So, the theory faces a dilemma of its own construction. Either the firms’ sustainability consulting is separated from their attest work, in which case there is no conflict of the kind alleged; or it is not, in which case existing rules already prohibit or condition the arrangement and the remedy is enforcement by the SEC and the state boards of accountancy.

Thirty-eight Demands, and No Allegation

The AGs’ demands are well designed to establish whether any audit was actually affected. They seek internal policies, training materials, changes to audit methodology, and instances in which partners raised concerns. However, the AGs do not allege a single instance in which an audit came out differently because of a climate commitment. Not one company, not one engagement, not one judgment. An appearance argument whose own authors could have converted it into a factual claim, and did not, is doing less work than it appears to.

The Theory Does Not Stay in Friendly Hands

Set the merits aside for a moment and consider the doctrine the AGs are trying to establish, because it will outlast this particular dispute. Independence rules exist to police an auditor’s entanglements with the companies whose numbers it checks—financial interests, business relationships, prohibited services. Every threat enumerated in the AICPA framework is relational. None of them concerns what a firm thinks.

This letter would convert those rules into a test of which policy positions an accounting firm may hold. If publicly supporting climate disclosure creates an appearance that an auditor has adopted an objective external to the audit, then publicly supporting the rescission of the SEC’s 2024 climate risk disclosure rule creates precisely the same appearance. So does testifying for tax reform. So does the profession’s own lobbying on auditor liability, on PCAOB funding, on any rule that touches its market.

A framework that turns on a firm’s opinions has no natural stopping point, and it does not stay in friendly hands. Attorney general offices change party, as do congressional majorities. Whatever theory is established here will be available, in identical form, to whoever holds those offices next, and the firms examined under it will be whichever ones took the other side. This is not a partisan observation, but rather the reason nobody should want this framework.

References to professional audit standards with no connection to actionable allegations intentionally invoke the prospect of investigation and professional discipline. That tactic is dangerous beyond this dispute.  Professional conduct standards are among the few things in American capital markets where both parties prioritize principles over politics. That restraint is worth preserving, and not only on principle. It is the reason audited financial statements are credible. The importance of investor confidence in the integrity of corporate disclosures is the sine qua non for maintaining the United States’ position as the world’s most robust capital market.

The Practical Assessment

In short, the assertions in the AGs’ letter, upon which all alleged legal violations rely, do not withstand scrutiny. It will certainly generate coverage, though we urge caution against anyone who may wish to build on this alarming precedent.

There are serious conversations to be had about the cost and utility of sustainability reporting, about what investors actually use, and about the proper scope of SEC disclosure authority. Regardless of one’s views on sustainability disclosure, meaningful progress will depend on a balanced and well-reasoned examination of the relevant legal, economic, and investor considerations.