States limiting business with banks that ‘boycott’ fossil fuels could pay high cost, study says

Republican state policymakers’ efforts to boost fossil fuels by prohibiting their governments from doing business with companies that take sustainability into consideration has the potential to cost states millions, according to a study released Thursday.

Researchers looked specifically at the possible effects on Florida, Kentucky, Louisiana, Missouri, Oklahoma and West Virginia if they passed Texas-like legislation limiting investment options on municipal bonds and found it could cost them between $264 and $708 million in additional interest payments. The study noted that the states had not passed such broad legislation.

The six states are among two dozen that last year issued proposed or passed legislation prohibiting state government entities from doing business with financial firms that take environmental, social and corporate governance (ESG) into consideration when making investment decisions as anti-ESG efforts spread from state treasurers and attorneys general to governors and lawmakers. Republican policymakers refer to ESG as the “boycotting” of energy companies and argue that the investment funds are following a liberal agenda that hurts jobs. 

The study by Econsult Solutions of Philadelphia was commissioned by the Sunrise Project for two groups focused on environmental policy, As You Sow, and Ceres Accelerator for Sustainable Capital Markets. It expands on a Wharton School of Business study released in July that focused on the cost to Texas after anti-ESG laws restricting business with banks that have policies against fossil fuels and firearms took effect there in 2021. 

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

“In the long run, we’re worried that those taxpayers and pension holders will actually get hurt with higher risk and low return,” he said. 

With Texas leading the way as the first state to enact anti-ESG laws, the study’s authors assumed passage 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 which corresponded to the implementation of the new laws.” The six were chosen because they had had more debate about anti-ESG bills and administrative action on ESG issues.

The Wharton study found that Texas paid higher interest rates because of less competition after major banks were forced from the state. Similarly, the Econsult study found that interest costs for its six states could balloon if they underwent Texas-like changes that influenced municipal bonds in addition to state actions.

• In Florida, the 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, the interest costs would be anywhere from $9 million to $29 million.
• In Missouri, taxpayers would see an increase in interest of $32 to $68 million.
• Oklahoma would have $49 million in additional costs.

“That is a burden on every taxpayer — every teacher, every elder citizen in those states,” Rothstein said. “That obviously doesn’t help anyone. It’s just higher interest costs, and that is because of having less bankers being able to bid for that work. That is one of the risks. And in addition, they’re also not going to be considering climate risk.”

Rothstein added that after the pandemic reminded people of how interconnected the supply chain is, it would be ill-advised to rule out considering climate risk, in addition to other ESG factors, and that ESG factors are only one set of considerations investors make among many.

Kentucky and West Virginia have now enacted bills restricting various government agencies and boards from doing business with financial institutions that “boycott” fossil fuels although neither reference municipal bonds nor are they as broad as the Texas legislation.

In Missouri, state Sen. Mike Moon, R-Ash Grove, has already filed anti-ESG legislation this session, similar to a bill he filed last year that restricted “public bodies” from contracting with businesses that used “ESG scoring.” It is one of three Senate bills aimed at what state officials have labeled “woke” investments. Last year, the state’s then Treasurer, Scott Fitzpatrick, pulled $500 million in pension funds from BlackRock, the world’s largest asset manager, saying the company had shown it would “prioritize the advancing a woke political agenda” over clients.

Michael Berg, political director of the Missouri chapter of Sierra Club, told States Newsroom he sees these efforts as a way for the fossil fuel industry to “buy time” and get in the way of any progress to address climate change. 

“This is a national organized campaign being pushed by the 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 policy push against ESG.

According to a New York Times investigation, the group coordinated with the Heartland Institute, Heritage Foundation, and American Petroleum Institute to push anti-ESG policy approaches since January 2021.

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