West Virginia recently became the second state to enact financial regulations designed to ward off efforts to deny fossil fuel companies access to banking services – but it looks like it may not be the last. On March 30, 2022, West Virginia Senate Bill 62 became law, requiring that all branches of state government cease doing business with any bank or investment firm engaged in a "boycott" of fossil fuel companies.
Most importantly, the law disqualifies any institution that boycotts fossil fuel companies from managing investments for the state's retirement funds. Even before the law's enactment, coal-heavy West Virginia had already pulled some assets from an investment fund managed by BlackRock following reports that BlackRock advocated that companies adopt measures to limit carbon emissions.
Texas – the Model for States Protecting Fossil Fuel Companies
West Virginia's new law follows in the footsteps of Texas, which last year enacted a bill requiring its comptroller to make a list of all financial companies that boycott energy companies. Any "financial company" – a category that includes any "publicly traded financial services, banking, or investment company" – engaging in such a boycott is subject to divestment from the state's retirement systems and school funds. These funds total approximately $273 billion in assets.
Last month, Texas Comptroller Glenn Hegar began enforcement efforts by sending out letters to 19 companies (including BlackRock) asking for "clarification" on their policies relating to investments in fossil fuels. Hegar said that at least 100 more companies will be receiving similar letters. Under the Texas law, companies have 60 days to respond or the state will presume that they are engaging in a boycott of fossil fuel companies. How this process plays out will merit close attention.
A National Battleground
The story in each state enacting anti-boycott laws is the same. Fossil fuel companies are facing climate activism channeled through the increasingly common use of ESG (environmental, social, and governance) criteria in investments. According to a database that tracks divestments from fossil fuels, governmental, nonprofit, and for-profit institutions have collectively divested $40.43 trillion of assets from fossil fuel companies. Legislators understandably want to shield this sector of their states' economies from damage that could result from fossil fuel companies lacking sufficient capital.
Notably, under these laws "boycott" is defined in a broad fashion, including any "action that is intended to penalize, inflict economic harm on, or limit commercial relations with" fossil fuel companies. As a result, the scope of financial industry activity that could be enough to trigger the anti-boycott laws is uncertain.
Legislatures in several other states, including fossil-fuel-heavy Louisiana and Oklahoma, are currently considering similar bills. These sorts of legislation promise a complicated patchwork of differing state requirements for financial firms with regard to investments in fossil fuel companies. And if that wasn't enough, other states are pushing in the opposite direction, considering laws to require their state retirement and pension funds to avoid investments in fossil fuel companies. Maine enacted a fossil fuel divestment law last year, and lawmakers in Virginia and New York have proposed similar laws.
A Path Through the Regulatory Jungle?
For now, it looks like one set of states will focus on directing their capital away from financial institutions that boycott fossil fuel companies while another set works to divest from the fossil fuel companies themselves. Accordingly, financial institutions may be able to satisfy the requirements of both sorts of laws by not boycotting fossil fuel companies. That path may allow them to avoid picking sides and continue doing business with both sets of states, but banks and financial firms would be well advised to be familiar with the requirements of each law when considering policies on investing in fossil fuels.
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