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US states take aim at “woke” financing

© Bloombergpemex shell refinery
The Deer Park Refinery in Deer Park, Texas.

Ask an oil company what the problem with the industry is these days and high up on the list will be complaints about a shortage of financing. People point the finger of blame at a variety of related factors such as a new craze for ESG, environmentalists, the government and the left.

Moving beyond grumbling, though, a number of resource-rich states in the US have set out legislation aiming to pressure investors to rethink.

States such as Texas and West Virginia have moved to cut off certain funds from state investments. The strategy is a natural response to the environmental divestment movement.

West Virginia has pointedly announced a move to stop investing with BlackRock. State Treasurer Riley Moore said his responsibility was to ensure that taxpayer dollars are “managed in a responsible, financially sound fashion”. This, he said, must reflect the “best interests of our state and country, and I believe doing business with BlackRock runs contrary to that duty”.

Jam tomorrow

The West Virginia senate passed the Senate Bill 262 in March, while Texas passed SB 13 in 2021.

SB 262 allows the treasurer to take action where there have been complaints from an energy company or where the media have reported a boycott.

Texas Comptroller Glenn Hegar sent out letters in March to 19 financial companies in an attempt to clarify their investment policies. Failure to provide clarification “will be presumed” to be evidence of a boycott. More are to come.

Hegar raised concerns about the future. “Are they selling the hope of a ‘green’ tomorrow with promises to divest or reduce their fossil fuel exposure?” he said.

These investors have promised a move away from oil and gas investing in order to drive a “swift and painless” transition. “Anyone who has paid any attention to recent events knows that just isn’t true.” Hegar explicitly singled out ESG devotees – in addition to the administration of US President Joe Biden – as thwarting energy investment progress.

Criticism of ESG does not focus on energy investments alone. Texas’ SB 19 targets investors that discriminate against the firearm or ammunition industries.

West Virginia’s Board of Treasury controls around $8 billion. As with all things, in Texas, the scale is much larger. The Teacher Retirement System alone controls more than $200bn of investments.

Utah politicians have taken umbrage at the idea of publishing ESG credit indicators at all. A letter to S&P Global Ratings said the move was “inherently political … and possibly illegal”.

Sector swings

Investing in commodities – and the companies that produce them – is common advice when inflation is on the rise. With WTI up 52% in 2021, and even higher in 2022, investments in oil appear appealing.

Before this run up in prices, though, the energy sector’s performance has been poor.

A report from Deloitte in 2020 found the shale industry in the US had impaired more than $450 billion of capital over 15 years. From 2010 to 2020, more than 190 companies went bankrupt.

While there is a political dimension to flying the flag against ESG and the “woke”, companies are taking a necessarily nuanced view. More and more companies are publishing reports demonstrating the ESG bona fides, around managing water risks and reducing operational footprints.

Furthermore, even while commodity prices have rocketed in recent times, companies remain conservative in their plans.

The Dallas Fed Energy Survey, a quarterly barometer of industry appetite involving anonymous comments, highlights uncertainty around the sector. Financing plays a part in this, but only in addition to regulatory, price and employment constraints.

High wire

ESG came of age in early 2020 with BlackRock CEO Larry Fink’s letter flagging concerns around climate change. Given higher commodity prices and political pushback, it is little surprise that fund managers have taken a more conciliatory stance.

Fink, in his letter this year, said any plan that aims to limit supply, without addressing demand, “will drive up energy prices for those who can least afford it, resulting in greater polarisation around climate change and eroding progress”. BlackRock has taken the line that it is responding to client demand for funds free of fossil fuels.

Proponents of ESG investing take broadly two main thrusts.

The first is to try and change company behaviour. For instance, by restricting cash flow into the energy sector in order to drive the transition to cleaner fuels.

The second is around the risk of these investments. Under this rationale, investments in the energy sector are exposed to long-term risk, as the world moves away from carbon.

Financiers are caught in a bind of their own choosing. There is customer demand for investments that avoid fossil fuels – and other investments such as firearms. Navigating between consumer demand and politicians will prove a delicate balancing act.

The statements from Texas and West Virginia acts as an effective threat. However, forcing a move away from low-cost investment providers like BlackRock will cost the taxpayers of these states.

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