January 25, 2023
A new study by The Sunshine Project warns that there will be a hefty price to pay for the 18 states that have passed or are considering anti-ESG divestment legislation similar to Texas’ SB-13 – which directs state investment funds to divest from companies who have been found to “boycott” energy companies.
The Sunshine Project relied on an earlier study completed by a University of Pennsylvania finance professor and an economist from the Federal Reserve Bank of Chicago, who in July 2022 found that Texas cities would pay between $300 and $500 million more in interest on $32 billion in bonds in the months directly following Texas implementing two of its 2021 boycott bills.
Since then more than half a dozen states have introduced similar bills, modeled off the American Legislative Exchange Council’s “Energy Discrimination Elimination Act,” which requires states to pull funds from asset managers that are deemed to be “boycotting” the oil, gas, and coal industries.
The Sunrise Project then analyzed six states that have either implemented or discussed adopting policies that target financial institutions over ESG principles. The six states studied – Kentucky, Louisiana, Florida, Missouri, West Virginia and Oklahoma – could lose between $264 million and $708 million if they follow in Texas’ footsteps.
Repercussions of such legislation include that many of the major investment banks will be forced out of the municipal bond market, resulting in fewer investment options and increased borrowing costs for local governments.
Ironically, many of the companies being targeted by Texas and other states that were studied are not in fact boycotting the fossil fuel industry, but are actually some of the world’s largest investors in the energy industry.
In fact, during a recent Texas State Affairs Committee hearing, a BlackRock executive – representing the only American company included on the Texas Comptroller’s main boycott list – explained that the asset manager has more than $310 billion invested in energy companies across the globe.
One question that remains to be answered, though, is why are these states and elected officials singling out financial institutions? Asset managers offer a wide array of investment products – for example mutual funds and exchange traded funds – and as a fiduciary, they have an ethical obligation to adhere to their clients’ investing guidelines, including whatever limitations they entail.
Financial institutions are not the ones leading the charge on ESG policies, yet are receiving the most heat as investment decisions are being politicized when they should simply be focused on financial returns. Asset managers have been caught in the crossfire of this debate, receiving criticism from blue states leaders and environmentalists for not using their proxy power to push ESG objectives farther, while simultaneously being told they’d crossed the line in red states.
These states choosing to politicize their pension funds by divesting from certain financial institutions are doing so at the expense of their taxpayers and pensioners who will be the ones stuck with financial consequences. Both sides of the aisle should recognize this is not a political issue and let financial institutions do their job, which is ensuring maximum returns for their shareholders.
