One example where this already may be the case is Texas. The state introduced two laws last year that bar banks that “boycott” oil and gas companies or “discriminate” against firearms entities from government contracts. The gun ruling resulted in lower municipal bond market share for banks such as Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. that sought to limit financing for certain retailers and manufacturers, said Rob Du Boff, senior ESG analyst at Bloomberg Intelligence.
However, the decision to exclude major banks on the basis of their ESG policies also made the market less competitive and probably led to higher coupon payments for Texas entities in the order of $303 million to $532 million in the first eight months under the new laws, Du Boff said, citing a study from Daniel Garrett of the University of Pennsylvania and Ivan Ivanov of the Federal Reserve Board of Governors.
Still, what if politics outweigh the financial downsides for states and all this anti-ESG bluster leads to more boycotts? Andrew Poreda, senior ESG research analyst at Sage Advisory Services, said the longer-term effects for the financial-services industry may be greater than generally perceived.
What’s happening in states like Florida and Texas highlights “a bigger fear that appears to be playing out,” he said in a telephone interview from his office in Austin, Texas. “Are asset managers ultimately going to be forced to pick a side and be ‘red’ or ‘blue’ managers? If you asked us six months ago, we would have thought that very notion to be far-fetched. Now, it sure looks like we are headed that way.”
This may end up having serious implications for asset managers, municipal bond underwriters and investment bankers in the country’s biggest states, Poreda said. It never used to be the requirement of a fiduciary to align ideologically in lockstep with their client, “but that appears to be our new future, unless cooler heads prevail,” he said.
This article was provided by Bloomberg News.