Muni Impact | January 12, 2023

The billion-dollar cost to the ESG culture wars

Andrea Riquier
ImpactAlpha Editor

Andrea Riquier

ImpactAlpha, Jan. 12 – Banks that use environmental, social, or governance, or ESG frameworks in their investing practice are being targeted by state legislators across the country. More than a dozen states with primarily Republican-led legislatures have bans on government business with those financial institutions, or are considering such bans in the future.

A new analysis finds that limiting the pool of banks for government contracts is likely to cost the states hundreds of millions of dollars in additional bond underwriting costs.

“The firefighters’, school teachers’, and municipal workers’ in these Republican controlled states are the folks suffering from the actions of their elected officials” said Andrew Behar of As You Sow, which released the study with Ceres.

  • Texas test case. The Lone Star State in 2021 passed laws prohibiting municipalities from contracting with banks that adhered to ESG principles or policies. A 2022 study found that limiting competition for municipal-bond underwriting cost taxpayers an extra $300 to 500 million. The Sunrise Project, on behalf of As You Sow and Ceres, commissioned the same economic consultant who ran the Texas numbers to come up with totals for states where similar legislation is under consideration or has recently been adopted. 
  • Mounting costs. The As You Sow-Ceres analysis examines six states: Kentucky, Florida, Louisiana, Oklahoma, West Virginia, and Missouri. It finds taxpayers will be on the hook for up to $708 million more if legislation is enacted, pushing estimated additional costs across the seven states to over $1 billion. That total masks some regional differences: a small state like West Virginia might see additional costs of $9 million to $29 million, while a powerhouse like Florida would likely bear $97 million to $361 million. 
  • Free-market principles? In a release introducing the report, As You Sow and Ceres representatives point out that managing financial risk – including those of the environmental, social, and governance varieties – is precisely what taxpayers require of their elected officials (see Imogen Rose-Smith’s latest column, “GOP ditches ‘pro-business’ with attacks on ESG that hurt corporations, investors – and red states”). Said Ceres’ Steven Rothstein, “These actions will increase costs and interfere with the free market in states that move forward.” 
  • It’s not just underwriting. Importantly, the new report only considers the additional costs to bond issuances. But municipal entities have multiple dealings with giant financial-services institutions: they manage money for public pensions and other government functions, provide banking services, and much more.