Texas officials ban bank from working with local governments over climate commitments — here’s how it’s affecting taxpayers
Last month, Texas Attorney General Ken Paxton announced that Barclays Bank was banned from working with local governments after it ignored questions from state officials about its climate commitments, as per Reuters.
That adds to the growing list of financial firms — which includes the world’s largest asset manager, BlackRock, Inc. — barred from doing business in Texas after Comptroller Glenn Hegar claimed they were boycotting the oil and gas industry, as The Texas Tribune reported. Banned investment funds numbered 348, according to S&P Global Market Intelligence.
What’s happening?
In a statement released by Paxton’s office Jan. 26, officials said they had determined Barclays was a member of the Net-Zero Banking Alliance, a global group of banks committed to financing climate action to reduce pollution levels.
“This raised concerns that Barclays’ activities may require it be classified as a ‘fossil fuel boycotter’ under Texas law,” the statement said, referring to state Senate Bill 13, which took effect Sept. 1, 2021.
The business journal Knowledge at Wharton said the law aims to protect the state’s powerful oil and gas industries by prohibiting local governments from working with banks that have environmental, social, and governance policies. These are standards that socially conscious investors use to evaluate companies’ environmental sustainability and ethics, according to Investopedia.
The banned banks can no longer underwrite municipal bonds, which help cities pay for daily expenses and finance major projects such as building schools or sewer systems, according to the Securities and Exchange Commission.
While the banks allegedly back ESG initiatives, they all still have significant investments in the dirty energy industry, according to Axios. Nevertheless, state officials see them as a threat.
Why is Texas’ ban on banks with ESG investments concerning?
As the University of Pennsylvania’s Wharton School explained, having fewer banks in the Texas market substantially increases borrowing costs for cities, resulting in higher interest costs for taxpayers.
A 2022 paper by the Wharton School estimated that in the first eight months under the anti-ESG law, Texas cities paid about $300-$500 million more in interest on the roughly $32 billion they borrowed.
In addition, Knowledge at Wharton reported that a growing number of conservative states, including Oklahoma and West Virginia, had started cracking down on banks over ESG policies.
“I think it does have a chance of becoming more common going forward,” Wharton assistant finance professor Daniel Garrett said.
What’s being done about anti-ESG legislation?
According to NPR, Texas is struggling to enforce the law because of “gaping loopholes in the legislation.” For example, companies can still do business with Texas while avoiding dirty energy investments as long as it’s “for strictly financial, rather than ethical or environmental, reasons.”
While Texas has a lot of power to influence financial firms, the global trend of moving away from gas and oil investments to climate-friendly companies could reduce the law’s impact. According to the Global Fossil Fuel Divestment Commitments Database, companies worldwide divested $52 billion from the gas and oil industries in 2014. By 2022, dirty energy divestment soared to around $40 trillion.
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