Okla. municipalities pay $185M more in bond costs due to anti-ESG law – study

Oklahoma municipal governments have seen a 15.7% rise in borrowing costs and an estimated $185 million in additional expenses since the state enacted legislation prohibiting contracts with financial firms that factor environmental, social and governance risks into their lending decisions, a new study found.

The Oklahoma Rural Association (ORA) commissioned the analysis from an economics professor at the University of Central Oklahoma. The group is "deeply concerned" about how the state's anti-ESG legislation is affecting ORA members, association President Monica Collison said in a letter accompanying the April 22 study.

The association represents rural and underserved communities across the state, many of which had to switch to smaller underwriters after Oklahoma enacted its Energy Discrimination Elimination Act (EDEA) in 2022.

The law prohibits ESG investment criteria, a tool used by the financial industry to assess long-term risks and opportunities. ESG critics have argued that Wall Street is embracing values that conflict with those in Republican-controlled states.

"As the study shows, these costs were avoidable and the direct result of the EDEA, which is detrimental to Oklahoma taxpayers, municipalities and businesses," Collison wrote. "We encourage Oklahoma lawmakers to enact legislation that reduces current confusion and shortcomings."

Under the Oklahoma law, major financial firms such as Bank of America Corp., JPMorgan Chase & Co. and BlackRock Inc. cannot enter state contracts. The state treasurer said in May 2023 that 13 financial institutions engage in "boycotts of fossil fuel companies" or failed to return a questionnaire to the treasurer's office.

Bank of America, JP Morgan Chase and BlackRock all continue to have extensive fossil fuel investments, but companies can also be banned in Oklahoma over their membership in climate groups such as the Net Zero Asset Managers initiative or Net Zero Banking Alliance.

A bill that would insulate struggling cities and towns from the EDEA was introduced in the Oklahoma Legislature in February, but it remains in committee with five weeks left of the legislative session.

The state law shrunk the lending market, forcing towns and cities to rely on smaller firms less able to take advantage of economies of scale, said study author Travis Roach, who leads the University of Central Oklahoma's Department of Economics.

Roach looked at data from 61,549 bonds issued in Oklahoma and five neighboring states between January 2018 and March 2023 to compare bond costs in states with anti-ESG laws with those with none. The findings backed up what some town managers were discussing publicly, he said.

"It's always nice to have what is anecdotal evidence ... and get an estimate that is just right in the ballpark of what these other reports have said," Roach said. "It tells you that your model is picking up some effects that are real."

Rising municipal borrowing costs from anti-ESG laws had previously been documented in a 2022 study by economists at the University of Pennsylvania and the Federal Reserve Bank. A subsequent 2023 study commissioned by two investor advocacy groups concluded that six states could face up to $700 million in higher municipal bond costs after adopting anti-ESG legislation.

There are 60 anti-ESG bills pending in 15 states, according to a tally by Pleiades Strategy, a climate change-focused management consulting firm. Since 2021, 257 such bills have died.