Red-state officials looking to punish financial firms that embrace sustainable investing practices could risk millions more in borrowing costs, a new study finds. Research by the Sunrise Project, a climate-focused nonprofit, estimates that if six Southern states follow Texas' model of boycotting firms, their costs in the municipal bond market could increase between $264 million and $708 million collectively. The study builds off an analysis of the financial impact of two 2021 Texas laws targeting firms' alleged boycotts of the fossil fuel and firearms industries. That study, by University of Pennsylvania and Federal Reserve economists, found Texas cities would pay between $300 million and $500 million more in interest on $32 billion in bonds, based on the exit of several large bond underwriters from the state after the laws' passage. The Sunrise Project analysis includes Kentucky, Louisiana, Florida, Missouri, West Virginia and Oklahoma — six conservative states that have either implemented or discussed adopting policies that target financial firms over environmental, social and governance investment principles. Some of those states' moves have come via legislation, while others are a result of state financial officers announcing anti-ESG boycotts and divestments. If the states follow Texas' lead in restricting banks' participation in municipal bonds markets, Florida would face the most extra costs across the six states analyzed — spending between $97 million and $361 million more. The research assumes that the same financial firms banned in Texas from underwriting are also prohibited from doing business with the six states included in the study. "The additional borrowing costs are essentially the result of reduced competition for the state's government bond issues, resulting in higher interest costs for taxpayers for both competitive and negotiated issues," the report found. Researchers used data on bond issuances to understand the size and composition of states' bond markets, including the relationship between issuers and underwriters and measuring historical reliance on targeted banks. The study presents an estimated range of costs if Texas-style anti-ESG legislation is enacted: The upper bound was calculated by applying the increase in interest costs to the final maturity of the bonds issued in the past 12 months, and the lower bound was calculated using the average time to first call date as reported in the Texas study. Daniel Garrett, a professor of finance at the University of Pennsylvania and co-author of the earlier study on Texas' anti-ESG policies, said the latest study is "very much in the spirit" of his research and is transparent with its assumptions. He added that other facets of public finance outside of the municipal bond market, like pension management, could also be impacted by anti-ESG rules. "It's a very interesting exercise from a policy standpoint that I think is important," he said. Kentucky last week announced its intention to blacklist BlackRock Inc., JP Morgan Chase & Co. and Citigroup Inc. West Virginia, Louisiana and Missouri announced last year that they would be pulling state funds from BlackRock and other firms. | 
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