(Knowledge at Wharton) A Texas law that bans its municipalities from doing business with banks that have ESG policies against fossil fuels and firearms is driving down competition for borrowing and costing taxpayers millions in extra interest, according to a new study from Wharton.
In their paper, Wharton assistant finance professor Daniel Garrett and Ivan Ivanov, an economist with the Board of Governors of the Federal Reserve System, documented the financial impact of Senate Bills 13 and 19, which took effect Sept. 1, 2021. The legislation is aimed at protecting Texas’ reliance on the oil and gas and firearms industries by prohibiting local jurisdictions from contracting with banks that have adopted environmental, social, and corporate governance policies against those industries. That means cities can no longer use those banks as underwriters for municipal bonds, which are one of the main ways that cities raise money.
After Texas passed the law, five of the largest underwriters exited the market: JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, and Fidelity.
“This is a really big rule for the municipal space,” Garrett said. “This is not the first time we’ve seen states use municipal markets as a way to enforce bank behavior they want to see, but this is new in its scale in that five large banks left Texas. [They] used to underwrite about 35% of the debt in the market, so they’ve left a really big gap.”
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