The fallout from Texas' Aug. 24 decision to blacklist some banks and investment funds over corporate policies toward fossil fuels may ultimately have little impact on U.S. financial firms. But the ban is causing some shake-up in the state's municipal bond market, where one underwriter in the last week had to pull out of two deals.

BlackRock Inc. was the only U.S. bank among the 10 targeted by the blacklisting. All others were headquartered in Europe — including some with little or no business in the state.

"There is definitely an incentive to not kick out people that you work with because it's costly," said Dan Garrett, a finance professor at the University of Pennsylvania's Wharton business school who co-authored a July study about the Texas bank policies. "They're very notably not banning the banks that they are most reliant on."

Even BlackRock could get a break if a state agency or pension fund determines that divestiture "would be inconsistent with its fiduciary responsibility," according to a 2021 analysis of the blacklisting bill by the Texas Senate Research Center. Such exemptions, codified in Senate Bill 13 passed in 2021, require a state entity to file a report every six months showing with objective data how divestment would result in financial losses, the analysis said. The law is replete with such exceptions.

The pattern of protecting banks that are important to the state was also evident with a similar policy announced in West Virginia, Garrett said. None of the banks targeted by that state's restrictions had major business in the state nor specific coal policies deemed detrimental to its economy, Garrett said.

For municipalities in the bond market, the situation may be a little different.

On Aug. 26, UBS Group AG, headquartered in Switzerland, voluntarily withdrew from a $44.4 million general obligation bond issue in Kerrville, Texas, following the Texas bank ban, the city's finance director, Julie Behrens, told S&P Global Commodity Insights. UBS was also removed as a co-manager of a $118.5 million waterworks and sewer bond issue by the city of Laredo, Texas, and was replaced with Wells Fargo & Co. after consulting with the Texas Attorney General's Office, the deal's financial adviser confirmed.

The Wharton School study that Garrett co-authored with Ivan Ivanov, a senior economist with the Federal Reserve Board in Washington, D.C., 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 two Texas' anti-environmental, social and governance laws went into effect in September 2021.

Noé Hinojosa Jr., president and CEO of Estrada Hinojosa & Co. and financial adviser for the Laredo bond issue, disagreed with that assumption and said the price of the Wells Fargo deal reached Aug. 30 was competitive.

"The markets are very strong, with or without Wall Street," Hinojosa said in an interview. "I'd like for everybody to play in our markets, but if our laws tell us we can't do that, the banks we have [left] are strong enough."

US banks made their case

The Texas legislation, in two bills, S.B. 13 and S.B. 19, that went into effect in September 2021, bars municipalities and public agencies from contracting with banks found to "penalize" fossil fuel or firearms companies. The legislation initially prompted some large banks to cease bond underwriting in the state, the Wharton study found.

Major investment banks, such as JPMorgan Chase & Co., The Goldman Sachs Group Inc. and Wells Fargo, were among 19 banks included in an initial investigation and put on notice by Texas in March. The banks fought back, responding in letters denying that they were boycotting the state's energy sector. Some pointed to the billions they have in outstanding credit to Texas oil and natural gas producers.

All were allowed to stay.

In the end, the result of the ban could, at most, shift investments from one fund to another within a company. JPMorgan Chase, for example, has three replaceable investment funds that Texas restricted: the firm's U.S. Sustainable Leaders Fund, the ESG Emerging Markets Sovereign ETF and the ESG USD High Yield Corporate Bond ETF.

Even so, the Texas decision to ban banks based on their ESG policies has rankled an industry that is also under pressure from investors and activists to do more in those areas.

'Not a fact-based judgment'

BlackRock, singled out as the only U.S. bank blacklisted by Texas, pushed back against the designation, as did several other banks.

"This is not a fact-based judgment," the world's largest asset manager said Aug. 30 in an emailed statement. "BlackRock does not boycott fossil fuels — investing over $100 billion in Texas energy companies on behalf of our clients proves that. Elected and appointed public officials have a duty to act in the best interests of the people they serve. Politicizing state pension funds, restricting access to investments and impacting the financial returns of retirees is not consistent with that duty."

A spokesperson for Schroders PLC said the London-based asset management firm, also on the banned list, has $19 billion allocated to the global energy sector.

"We are committed to maximizing returns for clients by actively engaging with the companies in which we invest," the spokesperson wrote in an email. "This process of engagement is driven by data and the deep analysis we undertake to assess and manage potential investment risk."

Many other banks on the Texas list declined to comment.

As for Texas' large oil and gas industry, which the state restrictions ultimately aim to protect, the bank ban will probably be of little import, analysts said.

"Will this publicity stunt give a boost to Texas oil and gas companies? Morally, perhaps," Felix Mormann, a professor at Texas A&M University School of Law, wrote in an email. "But financially, Chevron Corp., Exxon Mobil Corp. and other Texas oil-and-gas majors play in the global leagues. They are unlikely to feel the mandated divestment of ESG products by a handful of mid-sized pension funds, especially since the fund managers are not required to reinvest the divested funds in Texas oil-and-gas stocks."

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