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To: Interested Parties
From: Unlocking America’s Future
RE: Senate Budget Hearing: Investing in the Future: Safeguarding Municipal Bonds from Climate Risk
Date: January 10, 2024

As Senate Democrats prepare to hold a budget hearing on the impacts of climate change on municipal bonds, we are reminded that attacks on responsible investing (also known as ESG) seriously harm the financial security of local governments and cost taxpayers millions. 

An example of this can be found in Texas, a state that prides itself on its low taxes and business friendly environment. However, since the state took an aggressive stance against responsible investing, their reputation is taking a hit and being dubbed “bad for business.”

A Texas Case Study 

In 2021, Texas Governor Greg Abbot signed legislation requiring state entities to divest from businesses that “cut ties” with big polluters. In October of 2023, Texas Attorney General Ken Paxton released guidance which explicitly prohibited Texas governmental entities from entering into contracts with these businesses for the purchases of goods or services with a value of $100,000 or more. Paxton’s letter included a list of 22 companies he accused of violating the anti-responsible investing law.  

Since the Texas law was enacted: 

  • Major Bond Underwriters Have Left The State Costing Taxpayers:  Five major municipal bond underwriters, representing more than a quarter of all competitive-bid municipal bond offers in Texas, withdrew from the state.  As a result, municipalities are more likely to engage in negotiated borrowing instead of holding a bid auction, which means more expensive financing. Researchers found that for municipalities that had relied on the underwriters that left the state, borrowing costs went up by an average of 0.41 percentage points. 
  • The Bond Market Is In Turmoil: S&P Global reports that the Texas “municipal bond market is in turmoil” after Paxton issued his guidance, hurting small towns and everyday Texans.  
    • Within days of Paxton’s October letter, the small city of Del Rio dropped RBC Capital Partners, its lead underwriter for a $12.5 million municipal bond deal, and replaced it with BOK Financial Corp. The attorney general’s office had told the city it might not be able to close on schedule with RBC, prompting a last-minute scramble.  RBC Capital then did not appear on the most recent list of banned financial services companies, issued in December 2023. 
    • A Houston-area school district dropped Wells Fargo & Co. from a $310 million bond after Paxton indicated the company’s practices were being reviewed. Wells Fargo then did not appear on the most recent list of banned financial services companies, issued in December 2023. 
    • According to Bloomberg, in September 2022 the city of Anna, Texas, paid more than it should have on two bond sales totaling almost $100 million when it rejected the most competitive bid from Citigroup because of another Republican-backed state law punishing financial firms for promoting gun safety, costing the city more than $275,000.  
  • Hundreds Of Millions In Extra Borrowing Costs: An analysis by the University of Pennsylvania Wharton School and the Federal Reserve Bank of Chicago found that Texas municipalities will be paying $300 million to $500 million in additional interest because of the state’s anti-ESG law – and that’s just on the $31.8 billion borrowed in the first eight months after the law went into effect.   
    • A Bloomberg analysis found that since its anti-ESG laws went into effect, “Texas, with its perfect AAA credit rating, is paying 19 basis points more in yield (the equivalent of $1.9 million on every $1 billion of bonds sold) than AA rated California on routine borrowings.”