There's a new movement against Environmental, Social, Governance investing (ESG) in conservative states. What the new laws do is prevent banks who do ESG from doing business with the state, including buying municipal bonds. What's the cost of this move? In a new piece of research, Roach and Burdina look how much it costs local governments to be prohibited from doing business with ESG banks. It has a great title: “Cutting off the Fiscal Nose.”

I want to go over their findings, some interesting features of their study, and also think a little about the ideology of this anti-ESG move, and whether it's just ESG with a different ideology.

1. Context/methods

The exact policy in Oklahoma is called the Energy Discrimination Elimination Act (EDEA), which is interesting: can you discriminate against energy? The case of TX and gun industry is another use of civil rights to protect guns and gas. This law prevents local governments from doing business with big banks who do ESG.

In fact, a recent article our authors cite looked at Texas and found that the anti-ESG policy there increased borrowing costs by 300-500 million in the first 8 months. Some other researchers found that banning same sex marriage increases borrowing costs by 9.58 basis points statewide.

Oddly, they note, the policy "limits competition," which is what's supposed to be the big thing in capitalism that ensures freedom, lowers prices, etc. Conservatives have been free market zealots for so long, and here they are reversing that, limiting competition.

How'd the researchers figure out how much this law costs OK governments? They looked at the coupon rate for 68,000 bonds in OK. The coupon rate is the amount of interest a borrower like a school district has to pay out to bondholders and investors over the life of the bond, as percentage of the principal. Small increases, like a tenth of a percentage point, can translate to hundreds of millions of dollars. (They controlled for interest rate increases.)

When it comes to coupons, I always think about an image of Bill Gross, called the Bond King, who, early in his career, worked as a trader of municipal bonds at a bank, and he had to go to the basement, find the bonds that needed paying out, and cut the coupons out, mailing them to the bondholders.

If the coupon rate goes up, then the school district has to pay more. So the researchers tracked the coupon rate before and after the EDEA, using a difference in difference model, which is a popular statistical method.

2. Findings

When they crunched the numbers they found the coupon rate went up 53 basis points in Oklahoma. A basis point is a hundredth of a point, so .001. They found that the coupons went up by .053. Sounds small right? That jump represents a 13.9% increase from previous borrowing costs.

But in dollars and sense, they found that it cost OK local governments $164 million in additional borrowing expenses in the first year and a half of the policy.

What does this look like for a municipality? They give a wild example: "The city of Stillwater abandoned street and water infrastructure projects because borrowing costs would increase by nearly $1.2 million when switching from BOA to the next best alternative...who had an interest rate .7% higher."

As a coda (LOL), it turns out that the OK treasurer maintains the list of prohibited banks, and "he issued a statement that he would grant an exemption if an entity showed significant harm from the policy, and since then, both chambers of the OK legislature have passed a bill exemption local governments from the law." Awesome.

3. Ideology

I want to end by reflecting a little on this situation. What do ESG practices do exactly? They entail ideological interventions into fiscal action, historically encouraging progressive intiatives like green infrastructure, more democratic participation, and social equality along intersectional social categories. The paradigm case was divestment in apartheid South Africa through pensions and banks in the 1980s.

Essentially, it's a progressive ideological intervention. But the term ESG itself doesn't really entail any particular ideology: investing with an ideological concern, rather than merely the goal of fiscal returns, could be environmental, social, and governance related but not progressive.

So I would argue that the anti-ESG policies are also ESG policies, but with conservative ideology. They take into consideration discrimination, using civil rights language to protect their favored entities against the progressive tendency, like gas and guns and anti-woke and whatever else.

What this means is that there might be a cost associated with ideological intervention in fiscal action. What matters is not whether it's ESG or not, but rather what your ideology is, how much it costs to fight on behalf of that ideology in the municipal bond market. Oklahoma decided it'd pay $167 million for its ideological preferences, and Stillwater didn't get its infrastructure--until the treasurer basically copped out.