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Sustainability Matters

Let's Hope New Texas Law Turns Out to Be 'All Hat, No Cattle'

Blacklisting climate-aware asset managers adds risk to worker retirement savings.

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A Texas law passed last year calls for the blacklisting of asset managers that "boycott" fossil fuel companies. The statute requires the state comptroller to maintain a list of such firms, which would render them ineligible to manage money for state pension plans and other state entities.

The basis for the blacklist will be asset manager responses to letters sent by the state comptroller. Letters went out this week "to 19 major financial companies” that Texas suspects “may be boycotting the fossil fuel industry," according to a statement from the comptroller’s office. The letters ask the firms to say whether they are boycotting fossil fuel and to provide lists of any mutual funds or exchange-traded funds that prohibit or limit investment in fossil fuels.

Similar attempts to blacklist asset managers seeking to limit exposure to climate risks and to invest in the energy transition may be coming to more Republican-controlled states. The Texas law is based on model legislation provided to Republican state legislators by the American Legislative Exchange Council, which is funded by largely undisclosed corporate donors and is an avid supporter of the fossil fuel industry.

On substance, the law is, as they say in Texas, "all hat, no cattle." A close read reveals it to be little more than an invitation for Texas Republicans to publicly hector asset managers who are trying to position their portfolios for the transition to a low-carbon economy.

First, the law defines a "boycott" as something that is done "without an ordinary business purpose" to "inflict economic harm" on the fossil fuel industry. But asset managers do have an ordinary business purpose--it's called a fiduciary duty--to reduce risk and seek investment opportunities for all their clients based on the firm's investment expertise and best judgment. If the result for some firms or some of their funds is the avoidance of fossil fuels and the emphasis on renewable energy and other companies that have made net zero commitments, that's not a boycott--that's smart investing on behalf of a firm's clients, which is precisely the ordinary business purpose of the asset manager.

And in the ordinary course of investing, harm is inflicted all the time on industries and companies that are underperforming, and those whose business models are in decline. Such is the creative destruction that Schumpeter called the essential fact about capitalism.

Second, the law explicitly says that those running state pension plans don't even have to use the blacklist if they determine that doing so would be inconsistent with their fiduciary responsibility. Moreover, if the state entity is invested in public mutual funds rather than a direct separate account, it doesn't have to divest from a blacklisted fund at all, but is simply encouraged to swap out any fund that may avoid fossil fuels for one that doesn't.

In the end, the Texas blacklist will be pretty short, because few large asset managers have blanket restrictions against fossil fuel investments, and those that do can easily point to ordinary business purposes for doing so.

But the law provides Texas Republicans with an opportunity for big talk on behalf of fossil fuel interests. They are pushing what Prof. Michael E. Mann calls "climate inactivism" in their attempt to require investments made on behalf of workers in Texas state pension plans to prop up the fossil fuel industry and ignore the investment thesis for the clean energy transition.

Millions of Texas workers' retirement savings could suffer as a result. Let's hope that Texas pension plan administrators will assert their fiduciary responsibility to their participants and beneficiaries--and take advantage of the law's loopholes--to make sure blacklisting remains a talking point for politicians and not actual retirement fund investment policy.