Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies

Abstract

We study how restricting intermediary contracting over ESG policies distorts financial market outcomes. In 2021 Texas prohibited municipalities from hiring banks with certain ESG policies, leading to the abrupt exit of five large municipal bond underwriters. Issuers with historical relationships with the barred underwriters face higher uncertainty and borrowing costs after enactment of the laws, amounting to $300-$500 million in additional interest on $31.8 billion borrowed. These effects are consistent with deterioration in underwriter competition and loss of relationship-specific assets. We do not find that underwriter distribution network access or capacity constraints have a major impact on borrowing costs.

Keywords: ESG Policies, Public Finance, Municipal Bonds, Bank Competition

JEL Classification: G24, G28, H74