What do you want to know
- The Governor of Florida announced a bill that would prevent public fund managers from considering ESG factors when investing public money and prohibit discriminatory practices by financial institutions based on ESG score metrics. ESG social credit.
- Florida joins a growing list of mostly conservative states that have proposed or enacted anti-ESG legislation targeting financial institutions’ ESG policies.
- State-level anti-ESG legislation can impact municipal bond markets and increase borrowing costs if it forces or incentivizes some financial institutions to pull out of those markets.
Governor DeSantis said the proposed legislation and initiatives will “protect Floridians of the awakened capital” in response to “the corporate elite we[ing] their economic power to impose on the country policies that they could not achieve at the ballot box. Specifically, the bill:
- Prohibit financial institutions from discriminating against customers based on their religious, political or social beliefs;
- Prohibit SBA fund managers from considering ESG factors when investing state money; and
- Require SBA fund managers to only consider maximizing return on investment on behalf of Florida retirees.
Florida joins growing list of states proposing anti-ESG legislation
Florida joins a list of states that have proposed or enacted anti-ESG legislation, but is one of the largest states to propose such legislation, with considerable assets that would be impacted. Indeed, more than a dozen states have proposed or enacted laws targeting financial institutions that use ESG policies that would appear to threaten their livelihoods or run counter to prevailing political values in the state. Most of these states are conservative, like Texas, Oklahoma, and Kentucky, but “purple” states like Ohio and Arizona have also adopted anti-ESG measures.
For example, in 2021, Texas passed a law that prohibits its municipalities from doing business with banks that have ESG policies against fossil fuels and firearms, to protect Texas’ dependence on these industries. As a result, cities in Texas can no longer use banks with such ESG policies as underwriters for municipal bonds (although there are exceptions).
Unintended consequences of anti-ESG legislation
After Texas passed the law, five of the biggest underwriters left the municipal bond market: JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America and Fidelity. These five institutions used to guarantee 35% of the debt in the market. The gap they left in the market, the reduced competition following their departure, and the loss of historic relationships between various municipalities with these institutions increased borrowing costs. Indeed, a recent study by Wharton analyzed data from the first eight months of Texas law and estimated that Texas cities will pay between $303 million and $532 million extra in interest on $32 billion in bonds.
As states (especially conservatives) continue to consider and propose anti-ESG legislation, financial institutions may be forced to decide whether to exit these markets as well or otherwise assess their level and mode of participation . If that happens, there could be increases in borrowing costs similar to those seen in Texas due to reduced market competition and the loss of historical relationships with lending partners.