Oil-Friendly States Fight Back Against Sustainable Investment Trend
Climate and shareholder activists are leading a growing movement for investors to put their money only in companies with sustainable business practices, a standard that considers how a company is run, the working conditions in its supply chain and its effect on climate change.
But lawmakers in some energy-producing states are not only pushing back—they’re proposing the exact opposite.
In Alaska, North Dakota, Texas and other energy-producing states where fossil fuel taxes support state budgets, some lawmakers are introducing legislation that would force states to stop investing in companies that use sustainable strategies to make financial decisions and to cut ties with asset managers, banks and insurers that are doing the same.
The mostly GOP lawmakers argue that investment decisions should be made solely based on the likely financial returns, not so-called ESG—the environmental, social and governance criteria that socially conscious investors use. Instead of embracing ESG, several states want to double down on investments in oil, gas and coal. Otherwise, they say, the very industries they depend on face collapse.
It's already difficult for fossil fuel projects to find insurance, financing and other backing if they don't meet some of the sustainability standards, said state Sen. Jessica Bell, a Republican in North Dakota who has sponsored one of the bills that would keep her state from making ESG-driven investments.
"They're denied access to capital. They are denied access to loans. They are refusing to do business with them. Our insurance rates have gone up," Bell said. "I mean, you name it, ESG has already negatively affected us."
But bills like the one in North Dakota defy global financial and political trends. Some of the world's biggest investors have embraced divestment from fossil fuels, and have pressed large companies to disclose their future risk exposure to the effects of climate change. As more state, local and national governments establish greenhouse gas emission targets, they are demanding corporations meet their new regulatory requirements.
To do so, many companies are committing to net-zero targets that seek to balance their greenhouse gas emissions with those taken out of the atmosphere.
For example, in his annual letter to CEOs in January, the CEO of BlackRock, one of the world’s largest asset managers and investors, asked companies to disclose plans for how their businesses will be compatible with a net-zero economy or risk being left behind.
The Hartford Financial Services Group won't insure or invest in fossil fuel companies making more than 25% of their revenue from coal mining, coal-fired power generation or the extraction of oil from tar sands.
In states dependent on fossil fuels, however, leaders fear the ESG movement threatens the existence of industries that provide jobs and tax revenue. In Alaska, Republican Gov. Mike Dunleavy supports legislation that would cut the state’s ties to banks that refuse to support oil and gas exploration and drilling in the Arctic. His move came after multiple lenders, including Bank of America, Goldman Sachs, JPMorgan Chase and Wells Fargo, said they would no longer consider such investments.
"If a group of financial institutions want to make a political statement with their investment strategy, that is their prerogative," Dunleavy said in a statement announcing his plans. "But if Alaska does not have a robust oil and gas industry, our future is not bright."
North Dakota is at a similar crossroads: 53% of the state's tax revenue comes from taxes on oil production. Bell's legislation would keep the state investment board from putting money into ESG-driven funds—unless those investments have an equivalent or equal rate of return.
Her bill also would require the Department of Commerce to study how the state could completely divest from companies that boycott energy or commodity investments.
The legislation passed the state Senate and will next be voted on in the House. It has support from oil and coal trade groups in North Dakota, who said that the state's nearly $8 billion Legacy Fund—which is seeded with oil and gas production and extraction taxes—shouldn't be spent on investments that threaten the industry that created it.
"I think it helps us lead the way," said Bell, who works as an environmental manager at North American Coal Corporation, a mining company. "I am not going to apologize for that because of a political movement that has manifested itself in many ways, one of which being ESG."
The proposed law in North Dakota is based on model legislation developed by Jason Isaac, a former Republican state representative in Texas who directs the Life:Powered program at the Texas Public Policy Foundation, a conservative think tank in Austin.
Isaac said he got the idea for the model legislation from a 2017 bill that banned Texas from investing in funds that boycott, divest from or sanction Israel. Isaac thought such an approach would work for energy investments, too.
The foundation is pushing for similar legislation in Alaska, Indiana, Kentucky, Pennsylvania, Oklahoma and West Virginia. The bill in Texas goes even further than the North Dakota version. It would explicitly prohibit the state as well as local governments in Texas from doing business with any companies that divest from fossil fuels.
"These are just awful, awful policies, and we are pushing back," Isaac said. "And we're just saying, 'If you're going to have these policies, that's fine. You just can't do business with the state of Texas.'"
North Dakota state Sen. Merrill Piepkorn was one of only four lawmakers to vote against Bell's bill in the Senate. He is also the only Democrat on North Dakota's Senate Energy and Natural Resources Committee.
"Why would I vote for it?" Piepkorn said. "My fear is that we are just digging our heels in the ground, content to live in the past, and the rest of the world is passing us by."
He said that energy companies "come in and pretty much get what they want" from the state legislature.
"If we spent the money that we're spending on entrenching ourselves into this old technology, this old fuel source, if we spent that on the future, just think of where we would be," Piepkorn said. "I just don't want to be stuck in the past in North Dakota. And all of a sudden, we're stuck with nothing because we refuse to look to the future."
James Leiman, the new commissioner of the North Dakota Department of Commerce, said his department is neutral on the legislation. But he did tell North Dakota's Senate Energy and Natural Resources Committee that the ESG movement represents "the greatest challenge to the North Dakota economy since the Great Depression."
North Dakota's energy and agricultural sectors can't grow if they can't borrow money or access insurance because they don't meet ESG standards, Leiman said. Coal plants in North Dakota are closing because of market shifts as well as regulatory changes driven by other states that have established goals to reduce greenhouse gas emissions. North Dakota also faces a new federal regulatory environment, as the Biden administration is much less friendly to the fossil fuel industry than the Trump administration was.
But North Dakota also can learn to use the fervor for sustainable investment to its advantage, Lieman said. The state Department of Commerce plans to spend $250,000 to study how it can help existing businesses within the state manage ESG compliance, the commissioner said.
North Dakota will also continue investments in carbon capture and storage projects. That includes plans for a $1 billion facility known as Project Tundra that, if the technology proves successful, could capture the greenhouse gas emissions from any coal-fired power plants remaining in operation.
"State government is 100% behind industry in terms of creating that next-generation economy," Leiman said. "We're preparing for the eventuality of what the markets are telling us, as well as how to continue to grow our economy."
Many other states have already embraced investment that takes into consideration environmental, social and governance concerns, California among them. Its $444 billion public retirement system has long been considered a leader in sustainable investment.
In September, the Oregon Investment Council approved a policy formalizing the importance of ESG factors in investment decisions. State Treasurer Tobias Read said that considering sustainability in Oregon's $107 billion investment portfolio is not just a priority "but consistent with our fiduciary responsibilities."
"Institutional investors like Oregon benefit from paying attention to everything that can affect the health and long-term sustainability of our investments," Read said in an email. "That means looking at climate risks, the diversity of a company's leadership, or how companies treat their employees."
New York state's $226 billion retirement fund in 2020 adopted the goal to transition its portfolio to net-zero greenhouse gas emissions by 2040. To do so, the state will review its investments in energy sector companies, and where it's consistent with its fiduciary duty, will divest from companies failing to meet minimum standards.
Nationally, the Biden administration said it wouldn't enforce and is likely to rescind a Trump-era rule that made it more challenging for employers to offer ESG-related funds in retirement plans.
Consumers also crave sustainable investments, said Andrew Behar, the CEO of As You Sow, a shareholder advocacy group that pushes for environmental and social corporate responsibility. A report this year by the sustainable investment division of Morgan Stanley bank found that in 2020, funds that focused on environmental, social and governance factors weathered the year better than the portfolios that did not.
"It makes sense, because why would you want to be invested in your own destruction?" Behar said. "They don't want to be invested in climate destruction."