The influence of anti-environmental, social, and governance (ESG) laws on municipal borrowing costs is a topic of increasing concern in the financial world. Recent research conducted by the Oklahoma Rural Association sheds light on the detrimental effects of such laws on municipalities in Oklahoma. These laws, which aim to combat perceived boycotting of certain industries by financial institutions, have led to a significant increase in borrowing costs for local governments. This article will delve into the details of the study and its findings, as well as discuss the broader implications of anti-ESG laws on municipal financing.
The study conducted by Travis Roach, chair of the University of Central Oklahoma’s Economics Department, found that the Oklahoma law banning state and local government contracts with investment banks that “boycott” the fossil fuel industry resulted in a 59 basis point increase in borrowing costs on average. Over the 17-month period that the law has been in effect, approximately $4.6 billion of municipal bonds were issued at higher coupon rates compared to borrowings in states without similar laws. As a result, Oklahoma municipalities incurred an estimated $184.7 million in additional expenses.
The increase in borrowing costs imposed by the anti-ESG law creates an unnecessary financial burden on Oklahoma municipalities. The study highlights that this burden could potentially force local governments to cut spending on essential public services, infrastructure projects, or even raise taxes to cover the higher debt servicing costs. The restriction on large financial institutions from underwriting government debt in Oklahoma has further exacerbated the issue, as smaller firms lack the scale, scope, and experience to provide municipal bond issuance services.
In response to the unintended consequences of the anti-ESG law, Oklahoma lawmakers are considering changes to the Energy Discrimination Elimination Act. Senate Bill 1510, which passed the Senate in a 42-1 vote, aims to remove local governments and school districts from the law. Another proposed bill seeks to apply the provision against contracts with “boycotters” only to state agencies, while expanding the industries protected from boycotts to include timber, mining, and agriculture. Despite these efforts, some bills have faced challenges in advancing through the legislative process.
The negative impact of anti-ESG laws on municipal borrowing costs is not unique to Oklahoma. Similar laws enacted in Texas to protect industries such as fossil fuels and firearms have also resulted in higher borrowing costs for issuers in the state. A study conducted by Econsult Solutions Inc. projected that if similar bills were enacted in six other states, including Oklahoma, the additional interest costs could amount to millions of dollars over a 12-month period. The long-term consequences of such laws on municipal financing should be carefully considered by policymakers.
The financial impact of anti-ESG laws on municipal borrowing costs in Oklahoma underscores the need for a thoughtful and balanced approach to regulation. While the intent of these laws may be to protect certain industries, the unintended consequences on local governments and taxpayers should not be overlooked. As lawmakers continue to debate amendments to these laws, it is crucial to consider the broader implications on municipal financing and the overall economic well-being of communities.