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

64 Pages Posted: 7 Jun 2022 Last revised: 14 Jul 2022

See all articles by Daniel Garrett

Daniel Garrett

University of Pennsylvania - Finance Department

Ivan Ivanov

Board of Governors of the Federal Reserve System

Date Written: May 30, 2022

Abstract

We study how government regulation limiting the adoption of environmental, social, and governance (ESG) policies distorts financial market outcomes. The state of Texas enacted laws in 2021 that prohibit municipalities from contracting with banks that have certain ESG policies. This led to the exit of five of the largest municipal bond underwriters from the state. We find that municipal bond issuers with previous reliance on the exiting underwriters are more likely to negotiate pricing and incur higher borrowing costs after the implementation of the laws. Among remaining competitive sales, issuers face significantly fewer bidding underwriters and higher bid variance, consistent with a decline in underwriter competition. Additionally, underpricing increases among issuers most reliant on the targeted banks and bonds are placed through a larger number of smaller trades. Overall, our estimates imply Texas entities will pay an additional $303-$532 million in interest on the $32 billion in borrowing during the first eight months following the Texas laws.

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

JEL Classification: G24, G28, H74

Suggested Citation

Garrett, Daniel and Ivanov, Ivan, Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies (May 30, 2022). Available at SSRN: https://ssrn.com/abstract=4123366 or http://dx.doi.org/10.2139/ssrn.4123366

Daniel Garrett (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://fnce.wharton.upenn.edu/profile/danielgg/#research

Ivan Ivanov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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