August 29, 2022

To ESG or Not: “Damned If You Do, Damned If You Don’t,” at Least in Some US States


On July 28, 2022, the West Virginia State Treasurer named five banks as the first-listed Restricted Financial Institutions under West Virginia’s Senate Bill 262 for having engaged in boycotts of energy companies and thus effectively has banned these banks from future banking contracts with the state.

Apparently not to be outdone, on August 24, 2022, the comptroller of public accounts for the State of Texas (Comptroller) released the list of financial companies that boycott energy companies, a list required under the Texas statute (Tex. Gov’t Code sec. 809.051) prohibiting investment in financial companies that boycott certain energy companies (the Texas Boycott Code). The list includes 10 financial firms (mostly non-US banks) and 348 registered investment companies.

The criteria initially used by the Comptroller to screen financial firms for the list included public pledges to Climate Action 100+ and membership in the United Nations-convened Net-Zero Banking Alliance or the Net Zero Asset Managers Initiative, as well as ESG rating information provided by MSCI. Requests for verification were apparently also sent to the firms.

The listed funds were screened by using public information and requests for verification sent to the related fund managers.

The listing under the Texas Boycott Code will require certain Texas state governmental entities—comprising the Employees Retirement System of Texas (including a retirement system administered by that system), the Teacher Retirement System of Texas, the Texas Municipal Retirement System, the Texas County and District Retirement System, the Texas Emergency Services Retirement System, and the permanent school fund—to send a notice to listed firms and funds (financial companies) informing them that they have been so listed and warning them that investments in such financial companies shall be subject to divestment following a 90-day period unless they cease boycotting energy companies.

The release of the list has drawn a largely negative response from the industry. The Investment Company Institute stated:

The Texas Comptroller’s announcement today, which is a step toward having Texas state agencies boycott hundreds of investment funds, will only harm the ability of Texas police, firefighters, teachers, and other state civil servants to save for a secure financial future.


We urge Texas policymakers to prioritize Texas families over partisanship. State pension fund managers must be able to consider a broad range of investments that most appropriately support the needs of these Texas savers, free from politics.

There are also reports of some listed financial companies seeking an appeal of the listing, although there is no prescribed procedure for appeal from a listing under the Boycott Code.2

Other states that have similar laws to Texas' Boycott Code are shown in the chart below:

State Law (Adoption Date) Target


Senate Bill 205 (April 2022)

Fossil Energy Boycott


House Bill 2034 (May 2022)

Fossil Energy Boycott

North Dakota

Senate Bill 2291 (March 2021)

ESG Investments, Fossil Energy and Agricultural Commodities Boycott


Proposed similar legislation targeting fossil energy, firearms, and other industries is pending in many other states, including Arizona, Idaho, Indiana, Kentucky, Louisiana, Minnesota, Ohio, Oklahoma, Utah, South Carolina, South Dakota, and Wyoming.

In addition to adopting anti-ESG laws, some states are using their state retirement system investment authority to reflect similar anti-ESG provisions. As an example, the State of Florida’s Board of Administration on August 23, 2022, adopted a resolution updating its investment policies for the Florida Retirement System to require that investments be evaluated solely using “pecuniary factors” that “do not include the consideration of the furtherance of social, political, or ideological interests.” Although state pension funds are not subject to the Employee Retirement Income Security Act of 1974, the Board of Administration’s use of the term “pecuniary factors” is taken from the Department of Labor’s Financial Factors in Selecting Plan Investments regulation (“Trump ESG Rule”) that was issued in October 2020 during the waning days of the Trump administration. Shortly after Biden took office, the Department of Labor announced that it would not enforce the Trump ESG Rule and will be issuing new ESG regulations.


These developments are worth watching because the politicization of traditional fiduciary duties and functions entails related risk, including increased costs1 and the loss of (or at least a more limited range of) investment opportunities that may (or may even be likely to) result in impaired investment returns.



1 See, for example, the recent research paper “Gas, Guns and Governments: Financial Costs of Anti-ESG Policies” that estimates that Texas will pay an additional $303-532 million in interest on $32 billion of debt during the first eight months after adopting its anti-ESG laws.

2 Apparently prompted by related requests, the Comptroller published revised FAQs in November that included the following:

11. What steps can a financial company take to be removed from Annex I? As described in these FAQs, a variety of information was reviewed in the listing process. Because no single factor caused a financial company to be listed, we cannot identify a specific factor that would need to change for a company to be removed. A financial company wanting to be removed from the list should change its practices so that it does not refuse to deal with, terminate business activities with, or otherwise take actions intended to penalize, inflict economic harm on, or limit commercial relations with energy companies because they are energy companies. Consistent with the process described above, an entity that is no longer included on the Climate Action 100 and Net Zero Banking Alliance/Net Zero Asset Managers Initiative, would no longer meet the initial criteria for listing. Note that publicly available information for the financial services industry relevant to the energy company sector is dynamic and will be subject to potential statutory, regulatory, and industry changes. New information may be reviewed, or included in a verification request, for future updates to the list.


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