For years, fossil fuel producing states have watched investors shy away from companies causing the climate crisis. Last year, one state decided to push back.
Texas passed a law treating financial companies shunning fossil fuels the same way it treated companies that did business with Iran, or Sudan: boycott them.
"This bill sent a strong message to both Washington and Wall Street that if you boycott Texas energy, then Texas will boycott you," Texas Representative Phil King said from the floor of the Texas legislature during deliberations on the bill, SB 13, last year.
But the Lone Star state is straining to implement the law. Loopholes and exceptions written into the law could sap its impact on financial firms that have aggressive climate policies.
This March, the Texas State Comptroller began sending letters out to financial institutions, probing their climate policies. Leslie Samuelrich, president of Green Century Capital Management, a fossil fuel-free mutual fund, says her firm recently received its letter.
"It felt very politically motivated," she says. Samuelrich says she plans to ignore the one she got.
Even so, Samuelrich says the law could have a "chilling effect" on some investment firms.
Despite Texas's emerging problems in implementing the first law penalizing companies for fossil fuel divestment, the concept of boycotting green finance is spreading. At least seven other states are now considering or have passed similar legislation, raising the prospect of a coalition of fossil fuel producing states putting pressure on Wall Street.
"The state of Texas is a large state with a lot of money," says Rob Greer, associate professor in the Bush School of Government and Public Service at Texas A&M University. "They can certainly sort of make a difference. But when you're talking about the largest financial institutions...the global trends are going to be those that dictate a lot of this - and the state of Texas may maybe be out of sync with some of those global trends."
A popularity contest
Fossil fuels help to power the Texas economy, employing some 14% of Texas workers in 2019, according to the American Petroleum Institute. They also power the state's politics. The new law was written by Jason Isaac, a former legislator whose foundation takes money from the fossil fuel industry.
The law bars Texas's state retirement and investment funds from doing business with companies that the State Comptroller says are "boycotting" fossil fuels. The funds are worth approximately $330 billion, though it's not clear how much of them is invested in companies Texas plans to boycott. The law applies to new or existing contracts greater than $100,000.
Texas applies the term "boycott" liberally. Because of how the law is written, even firms that invest their customer money in fossil fuels but also offer fossil-fuel free financial products could be considered boycotters.
Since Texas passed its bill, at least seven other states have either considered or passed similar legislation. Last fall, a coalition of 15 treasurers from mostly Republican-led states published a letter saying they would stop banking with financial institutions engaged in "boycotting" fossil fuels.
But if the state boycotts are spreading, so too is the popularity of green investing. In 2014, there were some $52 billion dollars divested from fossil fuels worldwide, according to the Global Fossil Fuel Divestment Commitment Database. By 2022, that number stood at $40.43 trillion.
Experts are skeptical about the Texas law's chances of success. They point to gaping loopholes in the legislation. They say that the climate risks to the financial system are so huge that there's no real way to stop financial firms from pricing them in - and going greener in the process.
"I see this as just the next or one of many symbolic actions," says David Spence, a law professor at The University of Texas, Austin.
New documents obtained by the investigative reporting group Floodlight reveal just how much trouble the Lone Star State has had in trying to figure out who to stop working with.
The Comptroller's Dilemma
When the Texas state legislature originally debated its fossil fuel boycott bill, representatives from the State Comptroller's office pointed out an obvious issue: nobody had ever come up with a list of companies like this before.
"This is not obvious, you're really going to have to do a lot of research," says Sheri Greenberg, a former Democratic Texas state lawmaker who used to help oversee pension fund investments.
Texas is now learning how hard it is to sort out which financial firms are actually going green. There are no national standards for companies to report their greenhouse gas emissions.
A spokesman for the comptroller's office says the process "has proven challenging."
This spring, however, the U.S. Securities and Exchange Commission announced that it will begin standardizing how financial firms must disclose risks and opportunities from climate change.
But for now, figuring out who is really doing climate-conscious finance is actually quite tricky. So tricky, in fact, that the new law might even snare consultants the state hired to help.
Last fall,Texas hired MSCI Inc., a financial ratings firm that analyzes green investments, to provide data about financial firms, public records obtained by Floodlight show.
But there was a problem: MSCI is precisely the kind of company Texas officials are looking to boycott: it is committed to carbon neutrality before 2040.
That's the sort of thing that can now get you in trouble in Texas. In emails, a lawyer at the Comptroller's office worried the state might not be allowed to work with MSCI under the new law.
The lawyer's solution was to keep the contract cheap - under the amount at which the new law kicks in. After email negotiations on August 26th, MSCI agreed to drop its price from $100,000 to $95,000, emails show. The contract squeaked under the bar set by the new law, and was signed.
"The simple truth is that the creation of this list would present no challenge whatsoever if these companies were open, transparent and honest about their position on the fossil fuel sector," a spokesman for the comptroller's office wrote in a statement.
But the trouble with MSCI's contract is just the first hurdle the state can expect as it attempts to stem the tide of climate-conscious investing.
Loopholes and carve-outs
Because of the way that Texas has defined the term "boycott" in the law, financial companies that are merely investing in other funds that shun fossil fuels could possibly run afoul of the statute.
"Let's take Wells Fargo, for instance," says Greenberg, the former state pension overseer. "If they have any mutual funds or exchange traded funds in their portfolios that prohibit or limit investment in fossil fuels, then that is problematic." But the law also contains myriad carve-outs. For example, companies that want to work with Texas can still avoid investing in fossil fuels as long as they are doing so for strictly financial, rather than ethical or environmental, reasons.
"It's smart business to not invest in fossils," says Robert Schuwerk, executive director of the North American office of Carbon Tracker, a financial think tank that studies the green energy transition.
If a company believes that its fossil fuel assets are going to be worth less in the future because of things like carbon taxes, or more powerful natural disasters caused by climate change, then it makes sense for a company to sell those assets now, Schuwerk explains.
The Texas comptroller's office did not comment on the effect of exemptions in the law. A spokesman for the office directed questions about those exceptions to the legislature.
"We don't know what the impact will be to corporate behavior and wouldn't want to speculate on how companies will respond," the spokesman says.
Other states that have passed similar laws argue that allowing some exceptions won't weaken the effort.
"If they're making a business decision," says Riley Moore, the state treasurer of West Virginia, "somebody comes in for a loan for a coal company, and they decide that it's a big credit risk, and they don't want to do it, then that's fine."
Moore says he sees the law applying directly to companies' public statements.
"(If) they're saying we, as a financial institution, will not lend money to coal, for instance. That is a blanket statement that is a problem for the state of West Virginia," Moore says.
Samuelrich, the mutual fund manager, says that for her firm, being listed as a boycotted entity might not be such a bad thing.
"I don't think this is going to affect demand at all," she says. "In fact it might spur more people to realize that they can invest fossil fuel free."
This story is a collaboration with Floodlight, a non-profit environmental news organization.
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