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

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