Bonds

Oklahoma State Treasurer Todd Russ is ready to defend the state’s financial well-being against the “dangers” of using environmental, social, and governance factors in investment and credit decisions.

The Republican who took office Jan. 9 announced a plan last week to vet banks and financial companies under a 2022 Oklahoma law that directs his office to compile a list of fossil fuel industry “boycotters” for divestment purposes by state retirement systems. The law also prohibits state and local government contracts valued at $100,000 or more with companies that boycott.

“When we look back and thought we were always very conscious and involved in the general context of environmental concerns, social etiquette, and good governance, we felt like we had a great track record,” Russ told The Bond Buyer. “And then we find these big Wall Street financial, international money handlers kind of changed that definition and it pretty much begins to trample energy producing states like Oklahoma.”

The law defines “boycott” as refusing or terminating business activities with energy companies or taking actions intended to penalize or inflict economic harm on them without an ordinary business purpose.

West Virginia and Texas have already compiled their own lists of boycotters under similar laws, while Florida’s treasurer is removing BlackRock from its management of state assets due to the investment company’s ESG stance.

In Oklahoma, questionnaires were sent to more than 100 banks, financial institutions, and investment firms that do business with the state, giving them the opportunity  to attest to their business actions in the state, according to Russ.

Recipients have an April 1 deadline to respond and provide written verification they do not boycott Oklahoma energy companies. If they don’t comply, they will be presumed to be engaged in discriminatory activities and will be placed on the state’s boycotters list.

Russ said he is aware of the financial firms that landed on other states’ lists and he warned if those firms haven’t changed their position when they answer his questionnaire, they will be on Oklahoma’s list as well. 

“We want people who want to do business with us that like us and have the same values and support the economic industries that feed our families and put our kids through school,” he said. “If they’re going to be steering their board shareholders away from things that are good for Oklahoma, then I think the taxpayers deserve to be not only protected but also defended.” 

The Oklahoma law, along with reintroduced legislation targeting firearm industry discrimination, could impact municipal bond market participants.

Both have provisions requiring state and local government contracts valued at $100,000 or more to include verification from goods and services providers that they do not and will not boycott the fossil fuel industry or discriminate against a firearm entity. 

State Sen. Casey Murdock, who filed the firearm industry bill for this session after it fell short of passage last year, had targeted Citigroup, BofA, Goldman Sachs, and JP Morgan Chase for their “discriminatory” policies in Senate debate.

In Texas, the placement of UBS on the state comptroller’s boycotters list in August under a 2021 law resulted in the investment bank voluntarily resigning or being dropped from municipal bond deals.

A similar contract provision is in Texas’ 2021 firearm discrimination law and led to Citigroup’s ouster by that state’s attorney general last month.

Some major investment banks including JPMorgan, BofA,  and Goldman Sachs have been less active or inactive in the Texas muni market after the laws took effect in September 2021.

All three of those firms ranked in the top 10 for underwriters of muni bonds sold by Oklahoma issuers in 2022, while Citigroup was 12th and UBS was in 20th place, according to Refinitiv data. 

A study last year found the Texas laws may increase borrowing costs for issuers in the state as a result of less competition among underwriters.

A subsequent study by Econsult Solutions Inc. looked at the impact if similar bills were enacted in six other states, including Oklahoma, finding that state would have incurred an estimated $49 million in additional interest costs for bonds issued in the last 12 months.

Russ, who called himself a “huge Second Amendment supporter” and whose office oversees the Oklahoma Council of Bond Oversight, which approves the issuance of state debt, said he was not worried about losing the services of some big investment banks or losing money due to divestment.

“I have no reason to believe we don’t have sizable, competitive alternatives out there,” he said.

Oklahoma’s fossil fuel boycott law includes a provision that allows a governmental entity to opt out of the contract requirement if it is inconsistent with the entity’s constitutional or statutory duties related to debt issuance or fund management or if services are not “reasonably available” from another source.

A bill introduced in the Oklahoma Legislature this session expands the list of “economic boycotts” that would prohibit government contracts with companies to include the timber, mining, and agriculture industries, as well as boycotting businesses that do not adhere to environmental emission standards or do not facilitate access to abortions, sex or gender change, or transgender surgery.

Russ said he is concerned about rating agency use of ESG factors. Both S&P Global Ratings and Moody’s Investors Service have assigned moderately negative environmental scores to Oklahoma given its high concentration of oil and natural gas production. 

“I think that would be unfortunate for a rating agency that’s supposed to be evaluating the performance of bonds, not the environmental issues,” Russ said.

In September, attorneys general in four states — Missouri, Texas, Utah, and Kentucky — began probing S&P’s use of ESG factors in public finance ratings and potential violations of consumer protection laws. A spokeswoman for the Missouri Attorney General’s Office said the investigation was ongoing.

With meetings with rating agencies on the horizon, Russ is expecting rating upgrades for the state based on its strong economic performance. 

“We’re like a rock star in the economic drivers of cities and states across the U.S.,” he said. 

Oklahoma is rated Aa2 by Moody’s and AA by S&P and Fitch Ratings. 

Russ, who was elected Oklahoma’s 20th state treasurer in November, winning nearly 65% of the vote, said his background is a perfect match for the office. He has more than 30 years of banking experience, including CEO of the Washita State Bank. He also served six terms in the Oklahoma House of Representatives.

While Randy McDaniel, his predecessor as treasurer, warned last month growth in tax receipts was slowing, Russ said Oklahoma is prepared for a potential recession given its reserves and pro-business policies. The state ended fiscal 2022 with record general fund collections of $8.5 billion and a record $1.1 billion rainy day fund.

“If you want to go through this economic car wreck with airbags you need to be in states like Oklahoma that have all the protections provided to get through it rather than just a little strap around you,” he said.

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