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Wide open for business? Texas cancels firms over guns and oil, and the public will pay

Anti-ESG laws cut bond market competition, raising annual costs by over $400 million.

Elected leaders love to say Texas is wide open for business, but they’re closing doors on some giant financial firms with thousands of employees and billions of dollars invested here.

While the laws may score political points, taxpayers will be stuck with the bill: One study projects governments in Texas would spend an extra $416 million a year in higher interest costs because of reduced competition in the bond market.

The targeted companies include BlackRock, Citigroup, Credit Suisse, UBS and more, and they’re barred from directly managing state investments or underwriting bond offerings because of their approach to climate change and gun safety.

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It’s part of a Republican backlash to environmental, social and corporate governance initiatives, known as ESG. Two years ago, Texas lawmakers passed bills to protect the fossil-fuel and gun industries by punishing financial firms that embraced certain ESG policies.

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Last month, the Texas Office of the Attorney General “determined that Citigroup has a policy that discriminates against a firearm entity,” which meant Citi couldn’t conduct certain state business. When Citi was dropped from a $3.4 billion bond offering — a sale to raise money to pay costs from the February 2021 winter storm – Gov. Greg Abbott was eager to crow about it.

“Texas has a $2 trillion economy,” Abbott wrote on his personal Twitter feed on Feb. 10. “We won’t be bullied or discriminated against by woke ESG policies. We dropped Citigroup from the group of banks participating in [the] biggest-ever municipal-bond transaction from Texas.”

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Soon after Texas’ anti-ESG laws took effect in September 2021, five of the largest underwriters in the state exited the business, at least for a while. The “targeted banks” included Citi, JPMorgan Chase, Goldman Sachs, Bank of America and Fidelity Capital Markets, according to an analysis by Daniel Garrett of the University of Pennsylvania and Ivan Ivanov of the Federal Reserve Bank of Chicago.

“Before 2021, targeted banks underwrote around 40% of municipal bonds in Texas and submitted around 25% of competitive bids,” they wrote in a footnote to a chart tracking muni market share since 2017. “These shares both drop to 0% in September 2021.”

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The city of Anna, about a 30-minute drive north of Plano, was caught in the squeeze. Last fall, Citi had the most competitive bid for two bond sales totaling $99 million in debt. But after talking with the Texas Attorney General’s Office and other advisers, the City Council elected to pass on Citi and go with the second-lowest offer from Robert W. Baird.

The higher interest rate, about 3 basis points, will cost the city an estimated $277,334 over 25 years, said spokeswoman Frances La Rue.

“The more we pay in interest, the less money we have for all the other things governments do,” said Rob Greer, an associate professor at Texas A&M University who does research on budgeting and financial management in state and local governments. “There aren’t a ton of financial institutions serving as municipal bond underwriters. And competition is very important for local governments to get the best deal and the lowest interest rates.”

Citi has over 9,000 employees in Texas and in the three years before the anti-ESG laws were enacted, Citi led the financing of $16.5 billion of bonds in the state — more than any other underwriter, according to a letter to the attorney general’s office.

Citi wasn’t the only firm excluded from the state’s $3.4 billion bond offering; UBS Group was kicked off the deal in October.

That was shortly after the Texas comptroller put UBS on his list of 10 financial firms “boycotting” energy companies, a group that includes BlackRock, the world’s largest asset manager, and BNP Paribas, France’s largest publicly traded bank.

The alleged violations are different for Citi and UBS. Citi was “discriminating” against firearms companies while UBS was “boycotting” energy, according to state officials, but the upshot is the same.

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“These are demonstrations of opposition to ideas and institutions that are associated with the other party,” said David Spence, a professor who teaches law and business at the University of Texas at Austin. “It’s all about planting some sort of ideological or cultural flag in the ground, and it’s stupid.”

While Texas was the first to adopt anti-ESG laws, at least 16 other states have enacted or proposed similar legislation, including Arizona, Indiana, Kentucky, Missouri, Ohio, Oklahoma, South Dakota, West Virginia and Wyoming, according to Garrett and Ivanov.

In Florida, where Gov. Ron DeSantis has campaigned against “woke” capitalism, the state pulled $2 billion of investment from BlackRock in December over the company’s ESG policies.

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But in recent days, language in Florida’s anti-ESG rules includes a carve-out that lets targeted banks purchase or underwrite bond offerings in the state, said Garrett, an assistant finance professor at University of Pennsylvania’s Wharton School.

“They’re learning from the experience of Texas,” Garrett said in an interview. “They want to maintain competition in the public finance markets.”

In Texas, the anti-ESG laws go beyond excluding firms from selling bonds; public pensions and the Permanent School Fund cannot hold direct stakes in the targeted companies.

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The Teacher Retirement System of Texas, which has over $200 billion in assets, said it sold shares in BlackRock, BNP Paribas, Credit Suisse and others “to divest from this holding in accordance” with the law.

The system’s letter to state officials, dated Dec. 31, did not include the value of the divestments.

Forcing such divestments could have far-reaching effects, Greer said. Money has been pouring into so-called sustainable funds, which try to account for climate risk. If that segment booms in the future, Texas institutions could miss the upside and be more exposed on the downside.

“They may be investing in companies overexposed to hurricanes, floods and droughts,” Greer said. “This is purposefully ignoring something that could have a quantifiable, material risk to your investments, and state returns may suffer because of it.

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“This will take many years to play out,” he added, “but it’s certainly a possibility.”

Texas lawmakers worry about the oil patch attracting capital, especially when many are trying to cut their carbon footprint.

“We were concerned when we would read about major banks and Wall Street firms that were publicly stating, ‘We will no longer fund oil and gas projects,’” state Sen. Bryan Hughes, R-Mineola, said at a Texas Senate hearing in December.

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Cutting off energy funding would have dire consequences for Texas and the nation: “This is real,” Hughes said at the hearing. “This is family security, and it’s national security.”

He repeated a popular line from the debate on the bill: “If you boycott oil and gas, Texas will boycott you.”

But many targeted companies insist they’re not boycotting oil and gas, just as Citi said it’s not discriminating against firearms dealers.

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At the Senate hearing in December, which was held in Hughes’ East Texas district, lawmakers peppered a BlackRock executive about the company’s ESG policies. Dalia Blass, a senior managing director, said BlackRock was engaging on the topics because they’re important to clients, including those who want climate risk factored into their investments.

BlackRock’s clients choose their investments, she said, and many have selected opportunities here, including investing $107 billion in Texas energy companies as of September 2022. In just two years, she said, BlackRock put $31 billion in Texas energy.

“We believe in these investments,” Blass said at the hearing. “We do not boycott oil and gas.”

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About one year ago, after BlackRock CEO Larry Fink talked about the importance of transitioning to a “net zero” world, Lt. Gov. Dan Patrick urged the comptroller to put BlackRock at the top of the list of companies boycotting energy.

He cited a BlackRock fund that “would identify companies that appear to be ‘long-term, disruptive structural winners’ in driving down greenhouse gas emissions.” That indicates “BlackRock is capriciously discriminating against the oil and gas industry,” Patrick wrote in a public letter.

“As I have stated before,” Patrick wrote, “if Wall Street turns their back on Texas and our thriving oil and gas industry, then Texas will not do business with Wall Street.”

If such actions were aimed at boosting investment in the oil patch, there’s no evidence of that yet, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University.

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In general, many investors accept that fossil fuels remain an important part of the energy mix. They’re putting money into oil and gas even while adopting ESG policies, just as many oil companies pursue green projects while expanding drilling.

BlackRock isn’t “boycotting” Texas energy: “That designation is pretty unfair,” Bullock said. “That’s the market working.”