States that restrict business with banks that boycott fossil fuels could pay high costs, study says

Efforts by Republican state policymakers to boost fossil fuels by banning their governments from doing business with companies that consider sustainability could cost states millions, according to study published on Thursday.

The researchers looked specifically at the possible effects on Florida, Kentucky, Louisiana, Missouri, Oklahoma and West Virginia if they passed laws similar to Texas’s limiting investment options in municipal bonds and found that it could cost them between $264 million and $708 million in additional interest. The study noted that states have not enacted such broad laws.

Among them are six countries two dozen which last year issued proposed or enacted legislation prohibiting government agencies from doing business with financial firms that take environmental, social and corporate governance (ESG) into account when making investment decisions as expanding anti-ESG efforts from state treasurers and state attorneys to governors and legislators. Republican policymakers call ESG a “boycott” of energy companies and argue that mutual funds are pursuing a liberal agenda that hurts jobs.

In December, then-Nebraska Attorney General Doug Peterson issued an unsigned report warning elected officials against allowing ESG considerations in institutional fund investments.

The study, conducted by Philadelphia-based Econsult Solutions, was commissioned by the Sunrise Project for two environmental policy groups, As You Sow and Ceres Accelerator for Sustainable Capital Markets. It is expanding to the Wharton School of Business study published in July that focused on the cost of Texas after anti-ESG laws take effect there in 2021 that restrict doing business with banks that have anti-fossil fuel and anti-firearm policies.

Steven Rothstein, director of the Ceres Accelerator, calls anti-ESG legislation and changes to state pension funds “short-sighted” and “political.” He claims that these approaches will only hurt taxpayers.

“In the long term, we are concerned that these taxpayers and pension holders will actually be harmed with higher risk and low return,” he said.

Changes in municipal bonds

Texas leads the way as first state for anti-ESG legislation, the study authors assumed the adoption of similar laws and the same bond market restrictions in the six states they chose to examine.

They used data on municipal bond transactions from January 2017 to April 2022 and looked at changes in Texas bonds “that occurred during the last 12 months of the period corresponding to the implementation of the new laws.” The six were selected because they had more discussion on anti-ESG bills and administrative actions related to ESG issues.

Wharton study found that Texas paid higher interest rates because of less competition after the big banks were forced out of the state. Similarly, Econsult’s study found that interest costs for its six states could rise if they underwent Texas-like changes that affected municipal bonds in addition to state actions.

  • In Florida, costs would range from $97 million to $361 million.
  • In Kentucky, the costs would be between $26 million and $70 million.
  • For Louisiana, the cost would fall between $51 million and $131 million.
  • In West Virginia, interest costs would be $9 million to $29 million.
  • In Missouri, taxpayers would see a $32 million to $68 million increase in interest.
  • Oklahoma would have $49 million in additional costs.

“It’s a burden on every taxpayer — every teacher, every senior citizen in those states,” Rothstein said. “That obviously doesn’t help anyone. It’s just higher interest costs, and that’s because fewer bankers can bid on the business. That is one of the risks. In addition, they will also not take climate risk into account.”

Rothstein added that after the pandemic reminded people how interconnected the supply chain is, it wouldn’t be a good idea to exclude consideration of climate risk, along with other ESG factors, and that ESG factors are just one set of investor considerations among many.

Kentucky and West Virginia now they’ve passed bills banning various government agencies and boards from doing business with financial institutions that “boycott” fossil fuels, though they neither target municipal bonds nor are they as broad as the Texas legislation.

‘Awakened political agenda’

In Missouri, state Sen. Mike Moon, R-Ash Grove, has already filed against ESG legislation this session, similar to the bill he submitted last year, which prohibits “public bodies” from entering into contracts with companies that use “ESG scoring”. It’s one of the three Senate accounts aimed at what government officials have labeled “reawakened” investment. Last year, the state treasurer at the time, Scott Fitzpatrick, stepped down 500 million dollars in the pension funds of BlackRock, the world’s largest asset manager, saying the firm has shown it will “prioritize advancing an awakened political agenda” over clients.

Michael Berg, political director of the Missouri chapter of the Sierra Club, told States Newsroom that he sees the effort as a way for the fossil fuel industry to “buy time” and stand in the way of any progress on addressing climate change.

“This is a national organized campaign pushed by Republican Party politicians and conservative dark money groups controlled by billionaires and fossil fuel interests,” he said. Berg pointed to the influence of the State Financial Officers Foundation, a Kansas nonprofit that has been influential in the political push against ESG.

According to research by the New York Times, the group coordinated with the Heartland Institute, the Heritage Foundation and the American Petroleum Institute to promote anti-ESG policy approaches starting in January 2021.

“They (lawmakers) say they don’t like BlackRock looking at anything but immediate returns, but we have to see if they’re actually costing Missouri retirees because of policy decisions under the guise of opposing policy decisions,” Berg said.

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