Louisiana enacts anti-ESG measure targeting underwriters

Under Republican leadership, Louisiana has joined the red state battle against environmental, social and governance policies with the country's latest state-level law that bans doing business with corporations, including bond underwriters, deemed to be unfriendly to the gun industry.

Gov. Jeff Landry, a Republican who took office in January, has long advocated against ESG issues during previous roles as state attorney general and Congressman. Last week he signed into law Senate Bill 234, which the Legislature passed in 2021 but was vetoed by former Gov. John Bel Edwards, a Democrat, who had warned it would raise bond financing costs for local and state entities.

"Elections have real consequences," said National Shooting Sports Foundation (NSSF), the firearm industry's trade association, in a June 11 statement after Landry signed the bill into law.

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The Firearm Industry Nondiscrimination, or FIND, Act, requires any company entering into a state or local government contract worth $100,000 or more to provide written verification that it does not have a "practice, policy, guidance, or directive" that would "discriminate" against firearm entities or trade groups. The state attorney general will enforce the rule, which takes effect August 1.

The certification requirement is part of a trend of similar bills in other states, like Montana and Wyoming. It's needed to prevent banks from making false claims about their positions, said Darren LaSorte, director of government relations and state affairs for the NSSF, who spoke on SB 234 during an April 22 Senate Finance Committee hearing. LaSorte lobbied in Texas for a comparable bill in 2021.

"We've learned these banks are so big and so powerful that they literally don't care — they think they can do anything," LaSorte told lawmakers. "So what we looked to do in this language in this amendment is to create an enforcement mechanism that will be the model for the rest of the country. It has to be there because we found out they don't self-police. The big banks don't care what the law says."

The law marks the latest salvo in the wider culture war over ESG factors that's largely being fought in state legislatures across the nation, with Texas enacting laws in 2021 that have banned underwriters from state and local bond issues for "boycotting" or "discriminating" against the fossil fuel or firearm industries. The issue has gained some traction in Congress, where House Republicans are pursuing their own anti-ESG investigation.

In the last two years, several other states, including Utah, Oklahoma, Montana and West Virginia, enacted similar contract prohibition laws, according to a November 2023 paper from law firm Ropes & Grey LLP.

"While it is not always clear how a financial institution ends up on one of these restricted lists (in total, 30 institutions appear on one or more of the four state lists that have been made publicly available), once an institution is added, there is a sense of clarity as to what the consequences are — namely, the institution will be barred from transacting with the state unless it ceases to engage in the alleged boycotting activity," the firm said. "The fear of being added to these lists can have dramatic and real consequences in terms of financial institutions changing their investment practices and/or withdrawing from global climate coalitions to avoid the outcome of getting placed on a restricted list."

Another attempt to protect the firearm industry remained stalled in the Arizona House of Representatives as the legislature wrapped up its session Saturday. Senate Concurrent Resolution 1007, which passed the Senate in late January, would have placed a proposition on the next general election ballot to prohibit Arizona public entities from entering into contracts worth $100,000 or more unless the contract contains written certification from a company providing goods or services that it does not discriminate against firearm businesses or associations.

A 2022 law in Oklahoma restricting companies deemed unfriendly to the fossil fuel industry, which had led to four investment banks being banned from underwriting municipal bonds and targeting other financial firms for divestment purposes, remains on hold after a judge in May ordered a temporary injunction pending the outcome of a lawsuit.

Critics say the measures raise borrowing costs for state and local governments by reducing competition. Studies examining the impact of similar laws, including a 2022 paper, titled "Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies," and a March 2024 study for the Texas Association of Business Chambers of Commerce Foundation, found the restrictions raised financing costs. A 2023 study from Econsult Solutions Inc. speculated that an anti-ESG bill in Louisiana would have raised interest costs for bonds issued in the past 12 months by $51 million to $131 million.

A fiscal note for Louisiana's SB 234 warns the bill "may result in an indeterminable increase in state and local governmental expenditures across all means of finance," but added, the Office of State Procurement "is currently unaware of any supplier" that would potentially be excluded from state contracts as a result of the law.

"Voluntarily or involuntarily removing companies that provide goods and services to the government sector from future bidding will likely result in less competition among remaining bidders," the May 29 note said. "In turn, this may result in a marginal but indeterminable increase in overall costs if the remaining bidders marginally increase bid rates with the knowledge that competition has been diminished."

In Louisiana, "the legislature's intent is to send a very strong message to the entire Wall Street community," said Justin Marlowe, professor at the University of Chicago Harris School of Public Policy and director of the school's Center for Municipal Finance. "This has the potential to impact Louisiana in a much bigger way than the similar ban in Texas affected issuers."

The Lone Star State saw measurable, but not enormous, increases in borrowing costs, and the effects were concentrated in the "blue areas" of the state, he said. Texas has strong regional underwriters, but it's not clear if that's the case in Louisiana, he said. The effect on local Louisiana borrowers may be more "pronounced," Marlowe said.

In 2023, Louisiana issued $4.98 billion of bonds, according to LSEG. In comparison, Texas over the same period floated $59.01 billion.

When Landry was state attorney general, he sought to exclude Barclays, JPMorgan, Morgan Stanley, RBC Capital Markets, UBS, and Wells Fargo from the pool in a $275 million GO deal in the negotiated market in early 2023. The state, citing what it considers insufficiently pro-gun lending policies, had already taken BofA and Citi from its underwriting syndicate. Since then, Citi has exited the muni business, in a move that some market participants blamed partly on its inability to underwrite bonds in Texas.

The State Bond Commission, which oversees state and local borrowings and is chaired by the state treasurer, decided to move the deal to the competitive market to avoid the controversy. At the time, then-state Treasurer John Schroder said the restrictions would "basically eliminate eight out of the top 10 banks in America that do this kind of business ... That would not be wise as state treasurer who's looking after the money management side, to impose that on the citizens of Louisiana."

Louisiana's new Republican Treasurer, John C. Fleming, a former Congressman and founder of the House Freedom Caucus who also served as deputy chief of staff to former President Donald Trump, is opposed to "discrimination in all forms," including against the firearm, ammunition and fossil fuel industries, said a spokesperson for the office.

"These principles are reflected in SB 234, which was signed into law last week," the spokesperson said in an email. "However, before our department can comment on how the law impacts our current policies regarding bond underwriters or how it may affect the bond business in the state, it must be thoroughly analyzed by our staff. Since the law is brand new, more information is required, and more research must be conducted before our department can determine how the bill impacts the important work of the State Bond Commission."

In his Senate testimony, the NSSF's LaSorte acknowledged the measure may come with extra costs. "But that's okay because it's the right thing to do," he said, adding, "some companies are simply not worthy of receiving taxpayer money."

Year-to-date JP Morgan Securities LLC was the top senior manager in the state, with a 26% market share. Jefferies LLC ranks second, followed by Raymond James and Stifel Nicolaus & Co. Inc. BofA Securities Inc. ranked fifth, with a 9% market share, according to LSEG.

Last year, JPMorgan also ranked first in the state, followed by BofA Securities with a 14% market share, and Stifel Nicolaus, Wells Fargo & Co. and TD Securities LLC, said LSEG.

The impact on Louisiana's bond business may be more muted than some expect, said Ajay Thomas, senior managing director and national head of public finance at FHN Financial Capital Markets.

"While some firms may in fact be unable to provide the required state certification due to policies adopted or pursued by those firms, in all likelihood we will not see a massive shift in the ability of the state of Louisiana to access the municipal bond market at on-market pricing levels in any given market," Thomas said. "The state works with a number of municipal underwriting firms capable of providing municipal underwriting services without detriment to the state or its taxpayers."

An unexpected impact, however, could come in "other" services, such as depository services or credit liquidity providers, Thomas said, as those providers have decreased in number in recent years. 

The anti-ESG movement may be starting to impact banks' policies. BofA late last year softened its position on doing business with certain fossil fuel companies. In February, JPMorgan Chase and BlackRock announced they were pulling out of the Climate Action 100-plus investor alliance, which has been the subject of Republican state and federal scrutiny.

"Time will tell whether the state's action will alter the policy of certain financial services at the national or global level that do desire to conduct business with the state of Louisiana," Thomas said. "In Texas, the implemented policies are starting to make a difference in changing the policy discussion with financial services and other corporate entities, so one could argue we will likely see more of these policies take hold across the political spectrum, depending on the political will in a particular state."

Landry's office did not respond to a request for comment. JPMorgan, Stifel Nicolaus, Jefferies and Raymond James declined comment. BofA referred The Bond Buyer to its updated ESG framework, which "establishes an enhanced due diligence standard for clients and transactions involved in arms and munitions trade finance."

Karen Pierog contributed to this report.