An oil field in Odessa, Texas; some Republican-led US states want to exclude financial firms that refuse to invest in petroleum companies

“Social” investing strategies under scrutiny in Republican-led US states

Oil field in Odessa, Texas; some Republican-led US states want to exclude financial firms that refuse to invest in oil companies – Copyright AFP/File JOE KLAMAR

Juliette MICHEL

Republican-led US states such as Texas and West Virginia are putting pressure on firms, including asset management giant BlackRock, allegedly boycotting oil and gas companies as part of “responsible” investment strategies.

But companies say claims of a fossil fuel boycott are false, and rules barring states from dealing with big financial firms could potentially backfire on taxpayers.

To base investments in part on a company’s environmental, social and governance practices is a sign of an unacceptable “ideological agenda,” says Florida Gov. Ron DeSantis, who is seen as a potential Republican presidential nominee in 2024.

Late last month, he ordered the bankers who run the state’s massive pension fund to ignore those criteria and instead prioritize Florida’s “financial security over fanciful notions of a utopian tomorrow.”

Meanwhile, the Texas State Comptroller has released a list of companies, including BlackRock and several European banks, that are believed to be “boycotting” oil companies. Government officials were instructed not to sign any more contracts with firms on the list.

West Virginia, a smaller state but rich in coal and natural gas, also spun off not only BlackRock, but Wall Street pillars like JPMorgan Chase, Wells Fargo, Goldman Sachs, and Morgan Stanley.

“Any institution that pursues policies that weaken our energy industry, tax base, and labor market has a clear conflict of interest in handling taxpayer dollars,” State Treasurer Riley Moore said in a statement.

– “Disconnected from reality” –

However, the banks that were targeted deny that they are participating in such a boycott.

While some of them have decided to stop funding oil exploration projects in the Arctic, for example, they continue to lend to the industry.

JP Morgan denounced West Virginia’s rule as “short-sighted and out of touch with facts”.

BlackRock, the world’s largest asset manager, said it has invested more than $108 billion in Texas oil companies, including ExxonMobil.

Citing the new Texas rule, the Wall Street firm said in a statement that “elected and appointed public officials have a duty to act in the best interests of the people they serve. The politicization of state pension funds, the restriction of access to investments and the impact on the financial income of pensioners are incompatible with this duty.”

Joshua Lichtenstein, whose law firm Ropes & Gray monitors how states regulate investments in ESG, says the Republican attacks could be misguided.

“Political rhetoric refers to a non-existent world,” he said.

In fact, the choice is not between directing “investment capital to ESG or investment capital to earnings,” Liechtenstein told AFP. “It’s really about investing in funds that use ESG as part of their risk mitigation strategy.”

And investors are being nudged in that direction by a growing number of clients, not just in Democratic-led states in the US, but also in Europe and Japan.

Northeastern Maine passed a law in 2021 requiring the state pension system to get rid of fossil fuel stocks.

– Cost to taxpayers –

The new rules in Republican states could come at a cost to state taxpayers, said Ben Cushing, financial officer for environmental group Sierra Club.

Texas, for example, passed a law last year barring its cities from signing new contracts with banks that would restrict investment in oil companies or arms makers.

The result: The number of institutions involved in issuing municipal bonds in Texas has declined and contract rates have risen, costing taxpayers millions of additional interest, according to a June study by researchers at the University of Pennsylvania and the US Federal Reserve.

Liechtenstein said it was too early to judge the broader impact of the Republican campaign.

He said this would not necessarily threaten an already well-established trend: for example, clients are becoming more sensitive to climate change and investment managers still need to consider all the risks.

But “red states are probably the most vocal,” Lichtenstein added, and if Republican states like Florida actively enforce their new rules, fund managers could try to avoid conflict.

Ultimately, according to Sierra Club’s Cushing, this could force financial institutions to slow down their ESG efforts as they “belatedly tackle the climate crisis and recognize the very real financial impacts of climate change.”

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