Republican Gov. Greg Abbott of Texas signed two bills into law in 2021 that prohibit public entities from contracting with banks that restrict funding for fossil fuel companies or the firearms industry. |
In an increasingly polarized nation, large U.S. banks are trying to find a balance in operating in states that shun their corporate environmental and social policies while seeking to keep concerned shareholders and employees happy.
Adding to the pressure on large financial institutions is the scrutiny the U.S. SEC has been giving to corporate disclosures. According to media reports earlier this year, SEC staff in Texas have been focusing on banks' recent assurances to Republican-led states that they are not discriminating against fossil fuels or gun manufacturers, though critics say their public statements and disclosures to shareholders suggest something different.
An SEC spokesperson told S&P Global Commodity Insights the agency does not comment on "the existence or nonexistence of a possible investigation." But the growing focus on bank environmental, social and governance policies shows how U.S. politics and culture wars are touching some of the world's largest and most influential financial institutions in not-so-subtle ways — and how some banks are struggling to balance competing interests.
Correspondence from large U.S. banks that responded in May and June to a series of questions from Texas on their environmental priorities, along with letters several banks sent to West Virginia regulators earlier in July, shed light on this tension.
Banks: We do not 'boycott' fossil fuels
Privately, bank officials fret over the laws Texas and West Virginia adopted in the past year prohibiting banks with certain ESG policies from doing business with public pension funds, municipalities and state agencies. Such policies come as shareholders are increasingly pushing companies to respond to social and environmental concerns, and investments in ESG-focused funds have been growing in recent years. One bank official labeled the state laws "anti-free market."
On July 28, West Virginia Treasurer Riley Moore published a list of "restricted financial institutions," saying they were ineligible for state banking contracts.
"Each financial institution placed on the Restricted Financial Institution List today has published written environmental or social policies categorically limiting commercial relations with energy companies engaged in certain coal mining, extraction or utilization activities, rather than considering the financial or risk profile for each company," Moore said in a statement. "These policies explicitly limit commercial engagement with an entire energy sector based on subjective environmental and social policies."
The banned companies are BlackRock Inc., The Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. The policies of a sixth company, U.S. Bancorp, were reviewed, but Moore said "it demonstrated to the treasurer that it has eliminated policies against financing coal mining, coal power and pipeline construction activities from its Environmental and Social Risk Policy."
The two Texas laws, which took effect in September 2021, prohibit cities and towns in Texas from contracting with a bank that restricts lending or underwriting to the oil and natural gas industry or firearms companies. The West Virginia law, effective since June, authorized the state treasurer to investigate and refuse public contracts with banks that are moving away from fossil fuel investments.
In their correspondence with the states, the banks sought to prove that their ESG policies are, in fact, consistent with the new laws while reminding state officials that they continue to invest tens of billions in the oil and natural gas sector.
Goldman Sachs "advises energy companies with respect to financings and believes that energy companies with a diversification strategy in effect or in process are much more successful in obtaining financing," the company wrote in a July 7 letter to the West Virginia State Treasurer's Office after learning a month earlier it may be blacklisted by the state.
But Goldman Sachs also reminded the state, in bold lettering, that it provided "over $118.9 billion in financing to companies active across the fossil fuel lifecycle since 2016, and $17.8 billion in financing in 2021 alone." The bank is a member of the U.N.-convened Net-Zero Banking Alliance and the Net Zero Asset Managers Initiative and set a 2030 target to help clients in the oil and natural gas sector reduce their carbon intensity by up to 22%.
BlackRock, meanwhile, informed Texas in May that its clients have $115 billion invested in the state's energy industry alone, listing several large oil and natural gas projects, including Whistler Pipeline LLC's 450-mile natural gas pipeline in the Permian Basin. While a member of the Net Zero Asset Managers Initiative, the Climate Action 100+ network and other initiatives, BlackRock stressed that its "obligation is to our clients, and we have not made commitments or pledges to meet environmental standards that constrain our ability to invest our clients' money on their behalf consistent with their objectives."
'This kind of state intervention ends poorly'
JPMorgan Chase, the largest bank in the U.S. and another member of the U.N.-convened decarbonization initiatives, told Texas officials in May that "it does not 'boycott' energy companies" as the state had suggested, nor does it "discriminate against ... any firearm entity or firearm trade association." The bank said it would sign verifications to that effect.
As of Dec. 31, 2021, JPMorgan Chase had $42.6 billion in outstanding credit to the oil and gas industry, of which $23.1 billion was for exploration, production and oil field services, the company's correspondence with the two states shows. Its credits to utilities stood at $33.2 billion.
But the bank also informed Texas that it does not provide financial services where the risk is deemed to be too high. Such risks include development of greenfield coal mines and mountain top mining, development of new coal-fired power plants, and new oil and gas development in the Arctic.
The bank has come under fierce criticism from advocacy groups such as the Rainforest Action Network and been pressured by shareholders over its large fossil fuel investments.
JPMorgan Chase also expressed concern that an overly broad interpretation of the Texas laws could jeopardize contracts it had entered into with its public sector clients in the state. The bank was even more blunt in its response to West Virginia.
"It is regrettable that West Virginia is cutting itself off from parts of the market and attempting, via government action, to control the decisions made by private businesses," Stacey Friedman, the bank's executive vice president and general counsel, wrote July 8 in a response to the state treasurer's office. "There are many examples across the country where this kind of state intervention ends poorly, including imposing unnecessary costs and additional expenditure of taxpayer funds."
Study: Texas borrowing costs soared when top banks departed
A July study from the University of Pennsylvania's Wharton School estimated that municipalities and other public entities in Texas paid between $303 million and $532 million more in interest on the $32 billion they borrowed during the first eight months after Texas' anti-ESG laws took effect and the largest banks had to cease bond underwriting.
"I think the big takeaway here is that even in a big state like Texas, if they ask banks, 'are they willing to choose Texas over ESG?' they're willing to leave and the rest of the market is not able to absorb that loss," Daniel Garrett, an assistant professor of finance at the Wharton School and one of the authors of the study, said in an interview. "We're going to see large banks choosing their global policies over individual markets, and I'm not sure the same is going to be true for small banks."
The municipal bond data Garrett analyzed with co-author Ivan Ivanov, a Federal Reserve economist, showed that five leading bond underwriters — Bank of America Corp. Citigroup Inc., Fidelity Capital Markets, Goldman Sachs and JPMorgan Chase — immediately left the market after September 2021.
This, in turn, had a "significant impact on underwriter competition," their study said. "Remaining banks may enjoy increased market power due to barring banks with certain social and environmental policies from the market."
But Texas is also an attractive market for bond underwriters. It did not take long for at least one bank, Citigroup, to try to reenter the state.
'We must do our part'
Following the 2018 mass shooting at the Marjory Stoneman Douglas High School in Florida, Citigroup said it would no longer offer credit to gun retailers that sell weapons to people under 21, carry high-capacity assault weapons or do not conduct background checks. The bank had employees with children at the school who survived the massacre.
"We must do our part to keep guns out of the hands of those who wish to do harm," Ed Skyler, Citigroup's executive vice president for global public affairs, wrote in a blog post in March 2018 announcing the new policy.
Still, the bank's corporate gun policy does not contradict Texas' Senate Bill 19, which prohibits public entities from contracting with companies that "discriminate" against the firearm or ammunition industries, the bank has argued since. In April, Citigroup clinched an underwriting deal for a $1.2 billion bond sale for the Dallas-Fort Worth International Airport.
Correspondence from other leading U.S. banks to the state also signal they are ready to return.
As far as bank positions on climate change, elected officials in Texas and West Virginia may have won the first round in their battles against ESG, said Eli Kasargod-Staub, executive director of the shareholder advocacy group Majority Action.
"They have gotten a set of banks to redeclare their support for a fossil-fuel economy," Kasargod-Staub said in an interview. "The banks can make a viable argument to the states because they actually have not lived up to their pledges to realign their financing activities to support the kind of energy transition that the secretary general of the United Nations is calling for."
Banks have also successfully fought shareholder solutions that they transition their lending portfolios. Wells Fargo reminded West Virginia that it recommended against a 2022 shareholder proposal asking the bank to adopt "a boycott-like policy" to end underwriting and lending for new fossil fuel development.
"Adopting such a policy would effectively preclude us from offering general purpose loans to the oil and gas sector," bank officials wrote in their letter to the state. "We do not believe this approach is reasonable based on current energy usage and the potential negative impacts such a restrictive policy could have on the U.S. economy."
Texas is still compiling the list of companies that will not be allowed to do business in the state over their energy policies and expects to have it ready by Sept. 1.
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