Borrowing costs rose in the wake of Oklahoma's anti-ESG law: study

An Oklahoma law that banned state and local government contracts with investment banks that "boycott" the fossil fuel industry boosted municipalities' borrowing costs by 59 basis points on average, according to the latest research into the financial impact of so-called anti-environmental, social, and governance laws.  

The study released Monday by the Oklahoma Rural Association comes as state lawmakers are considering changes to the 2022 Energy Discrimination Elimination Act.

Travis Roach, chair of the University of Central Oklahoma's Economics Department, who conducted the study, found that over the approximately 17 months the law has been in effect, about $4.6 billion of municipal bonds were issued at higher coupon rates relative to borrowings in four states without a similar law. As a result, Oklahoma municipalities incurred an estimated $184.7 million in additional expenses.

Bloomberg News

"This increase in borrowing costs imposes an unnecessary financial burden on Oklahoma municipalities, potentially forcing them to cut spending on important public services or infrastructure projects, or raise taxes to cover the higher debt servicing costs," the study concluded. 

As large financial institutions "with the scale, scope, and experience of providing municipal bond issuance services" are banned from underwriting government debt in Oklahoma, borrowing costs may increase simply because smaller firms lack that reach, it added.

The law landed Bank of America, JP Morgan, and Wells Fargo on the Oklahoma Treasurer's "boycotter" list last year, resulting in Wells Fargo's resignation as lead manager for a $500 million Oklahoma Turnpike Authority revenue bond sale.

Monica Collison, president of the ORA, an organization created to support economic development and infrastructure for the state's rural communities, said while the law aimed to be "a 'solution' to combat the misguided perception of boycotting by financial institutions of certain industries," the result was a politically motivated attempt to remove certain banks from operating in Oklahoma.

Oklahoma Treasurer Todd Russ was aware of the "unintended consequences" posed by the law's inclusion of state political subdivisions, according to Deputy Treasurer Jordan Harvey, who noted legislation introduced this session seeks to amend the act. 

Senate Bill 1510, which would remove local governments and school districts from the law, passed the Senate in a 42-1 February vote and moved to the House. 

Another bill would apply a provision against contracts worth $100,000 or more with "boycotters" only to state agencies, while adding timber, mining, and agriculture to industries the law aims to protect from boycotts. The measure passed the House in a 78-15 March vote, but failed to advance out of a Senate committee by a legislative deadline. 

Another bill that would require the treasurer to seek an opinion from the Oklahoma Attorney General if there is a fiduciary or other dispute with a state government entity regarding the law passed the Senate in March. 

Senate Bill 469, which sought to extend the energy law's divestment requirement to the higher education sector, stalled in the Senate.

A 2022 academic paper found similar Texas laws enacted in 2021 to protect the fossil fuel and firearm industries against boycotts and discrimination may increase borrowing costs for issuers in the state as a result of less competition among underwriters.

A subsequent study by Econsult Solutions Inc. looked at the impact if similar bills were enacted in six other states, including Oklahoma, finding that state would have incurred an estimated $49 million in additional interest costs over a 12-month period.

In March, a Texas business group released a study that concluded average underwriting spreads for local bond issues in the state rose dramatically over the last two fiscal years since the anti-ESG laws took effect.