Anti-environmental investing law costing Texas taxpayers $445 million a year

Over the past decade, many industries have placed more emphasis on managing their ESG (environmental, social and governance) risks and investors have been rewarding firms that use ESG data in their investing  with increased capital inflows and higher equity valuations.  Investment firms also have added offerings that avoid environmentally dangerous industries or invest in companies that are focused on energy efficiency, water conservation, or wildlife protection.  To maximize shareholder value, some banks have also adopted ESG investing practices that evaluate companies on how well they are managing relevant risks including  climate risk and governance practices as compared to their peers.    

Because of Texas’ large oil and gas industry, some Texas lawmakers have chosen to interpret this as an attack on the state, rather than a shift in the priorities and preferences of a functioning market. In 2021, legislators introduced Senate Bill 13, which banned banks that had divested from the oil and gas sector from participating in public finance markets in the state. A similar bill, Senate Bill 19, banned state and local governments from contracting with lenders that are limiting business in the firearms industry. Both laws took effect in September 2021.

Tampering with the market in such a manner will have consequences in many realms, but a study done by Daniel Garrett, of the University of Pennsylvania’s Wharton School of Business, and Ivan Ivanov, an economist with the Board of Governors of the Federal Reserve System, focused on the effects on municipal bond issuance, with shocking findings. As a result of Senate Bills 13 and 19 described above, five of the largest bond underwriters in the nation exited municipal bond underwriting (Citigroup, JP Morgan Chase, Goldman Sachs, and Bank of America, Fidelity). Because of this, local governments no longer have access to the national bond networks of the major banks, and there are fewer underwriters competing for these state and local municipal bonds.

As a result, affected localities are:

• more likely to issue through a negotiation than an auction (which usually results in less favorable yields)
• receiving fewer and less competitive bids from underwriters
• raising less financing
• incurring higher borrowing costs

This is costing Texas taxpayers approximately $445 million a year in additional borrowing costs, assuming no other banks leave the underwriting business. This figure and analysis deals only with municipal bond issuance and does not describe the effects of the state’s boycott on the selection of profitable investment firms (such as the 5 firms mentioned above and  environmentally focused funds such as Green Century Funds) for pension funds and similar government investments, which has yet to be investigated.

Anti-ESG policies that result in major bank exits leave local governments facing significant adverse consequences. So far, Texas has been the only state to adopt anti-ESG laws. However, Arizona, Indiana, Kentucky, Missouri, Ohio, Oklahoma, South Dakota, West Virginia and Wyoming have similar proposals going through their state legislative processes. The Attorney General of Louisiana also has rejected municipal bonds issuers on anti-ESG grounds. 

Economists from Econsult Solutions have used the Texas results to predict what would happen if the other states implemented similar bans and found the following:

• Kentucky – $26 million to $70 million in additional interest costs
• Florida – $97 million to $361 million in additional interest costs
• Louisiana – $51 million to $131 million in additional interest costs
• Oklahoma – $49 million in additional interest costs
• West Virginia – $9 million to $29 million in additional interest costs
• Missouri – $32 million to $68 million in additional interest costs

Rep. Jon Rosenthal has filed HB 1091 to repeal the law, but it faces long odds at passage. Doubling down on the anti-ESG move, last month Rep. Tom Oliverson introduced HB 1239, which would prohibit insurance companies from considering a “customer ’s environmental, social, and governance score that is based on measuring a customer ’s exposure to long-term environmental, social, and governance risks” when establishing rates.

The Legislature needs to stop wasting taxpayer money to make vindictive and meaningless political gestures. The market is changing its priorities and preferences and there is nothing that can stop this fact.