Business course

Texas’ response to ‘woke’ investing looks a bit woke


One of the most surprising things about Texas’ anti-ESG law, which has just been unleashed on companies like BlackRock Inc., is that it turns out to offer a big lesson in environmental investing’s cousin, social and governance, socially responsible investment, or SRI. Not intentionally, of course.

ESG investing is often confused with SRI. The two are lumped together under the name financial piety or under that term now so overused and abused that your dad probably says it, “woke.” It’s not the same thing. SRI is based on values ​​and most often excludes: “I don’t want to fund X unwanted sector, so I won’t give it my money. ESG is risk-based and more nuanced: “I anticipate risks related to ESG issues that can either alter or increase the value of a stock, consider actions to address it, and then underweight or downgrade it. overweight accordingly.” SRI is about maximizing virtue; ESG is about maximizing wealth.

Can ESG labels be used to mask other intentions? Sure; as with any other investment theme, there is great potential for peddling or simple negligence. Even Larry Fink, CEO of BlackRock, is known to confuse ESG and SRI.

And now Texas too, in an interesting twist on the theme. Under Senate Bill 13, which took effect nearly a year ago, the state comptroller has drawn up a list of financial firms deemed hostile to fossil fuel producers, who will now face barriers, or even outright exclusion, from doing business with state and local entities. , such as raising municipal bonds. In theory, the law punishes Wall Street companies with ESG policies that could, for example, cause them to suspend lending to an oil producer.

In practice, this is true to some extent: the big financial firms would prefer not to lose any business in the country’s second-largest economy. But also in practice, the law is full of loopholes that can mitigate its impact; one allows state pension funds not to sell any stakes involving the banned companies if doing so would harm their performance. It’s a little big and it gives an interesting twist. Because what Texas is doing here is akin to SRI.

There is an annoying tension in the workings of the law – if that word can be used – in that banned companies say they use ESG literally to manage risk, while Texas officials dismiss it as only imposing left-wing values. In doing so, the state has effectively adopted this deft feat of simultaneously covering its eyes and putting its fingers in its ears.

Because while one doesn’t like the idea that a core industry in one’s state – oil and gas – is facing existential risk due to efforts to curb climate change, that situation is impossible. to deny. This is precisely why the largest oil and gas companies residing there no longer deny it. In a delightful moment, the same day Texas released its version of the index prohibitorum, it emerged that California would ban gas-powered cars by 2035. Now, of course, the policy can be said to be wrong or too expensive; it is a valid debate. But to say that companies that lend or invest in the oil industry should ignore the biggest auto market in the United States – which also sets the regulatory agenda in many other states – ban the biggest source of demand for oil is simply illusory.

Or, in other words, it’s a values-based boycott. Just like SRI. And just like SRI, by limiting the options of Texas pension funds and municipal issuers, it will come at a cost. This is how SRI works: you are holding back dollars and thereby increasing the cost of capital for your chosen target, but in doing so you are taking a hit to your own risk-adjusted returns (see this). In the case of Texas, another law targeting companies reluctant to do business with gun makers has already cost its taxpayers half a billion dollars, according to an article published this summer. Have I compared these laws to socially responsible investing? Fiscally irresponsible invective might be closer to the truth.

More other writers at Bloomberg Opinion:

• Matt Levine’s Money Stuff: AMC’s APEs could stick around

• California winery cheats on climate change: Amanda Little

• Has Congress really snubbed the Supreme Court on climate? : Noah Feldman

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Heard on the Street section of the Wall Street Journal and a reporter for the Lex section of the Financial Times.

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