“Today, I’m thankful to live a high-carbon lifestyle and wish the rest of the world could too.”
This is a Thanksgiving tweet from Jason Isaac, a director at the pro-oil / gas Texas Public Policy Foundation (TPPF), based in Austin, TX. It’s funded by the likes of the Koch Brothers, Exxon and Chevron. But this tidbit of climate-denier trolling is a sideshow to more devious, and probably unconstitutional, red state laws that Isaac and TPPF are promoting for their patrons.
TPPF has stimulated what they call “anti-boycotting” laws in 18 Republican controlled states (Texas, Florida, Louisiana, West Virginia, etc.) to prohibit their in-state public pension plans and municipalities from doing business with investment managers and banks that “boycott” oil and gas companies (as well as other locally favored in-state industries) or that use ESG factors in making investment decisions. These laws are vaguely worded — making it hard to figure out what “boycotting” means — and give state officials indiscriminate and unreviewable blacklisting authority. As such, an investment firm that has just one ESG investment product for clients in other states is at risk to be blacklisted.
Guess who’s been blacklisted so far? The bulge bracket, money center firms on the East and West Coasts: Blackrock, Goldman Sachs, JP Morgan and Wells Fargo, as well as some Scandinavian firms. Ironically, instead of boycotting, all the blacklisted US firms actually have significant investments in oil and gas companies. Blackrock is the lead blacklist victim so far even though it's probably the largest investor in oil and gas companies in the world. But its CEO, Larry Fink, has led the charge advocating investors focus on how well companies will thrive as global pressure builds to reduce emissions and pollution. Red state politicians call that “woke.” We think it’s just facing facts. Nevertheless, more blacklisting laws are being enacted and state officials, with broad legislative authority, can blacklist wherever their political whims take them.
Forcing investment managers to drop climate and ESG factors from their investment processes for out-of-state clients as a condition to do business in a state like Texas, struck us as problematic under the Commerce Clause of the US Constitution. That provision gives sole authority to the US Congress to regulate interstate commerce and the Supreme Court has repeatedly held that state laws favoring in-state commercial interests vs out-of-state interests are invalid.
The Supreme Court has allowed a small exception to the general rule. States may use state government funds to favor in-state firms and industries, even if it means buying in-state products and working with in-state firms that cost more and don’t perform as well. It’s not a great idea, but Texas may be free to legislate that its pension funds invest in oil / gas companies and drop ESG factors from their investment decisions. But the Texas law doesn’t actually make its pensions invest in oil / gas; rather, the law makes national investment managers (and thus their out of state clients) invest in oil / gas as a condition to manage investment funds in Texas. Of note, oil / gas has been the worst performing sector in the S&P 500 the past decade even with the recent run-up.
The Supreme Court’s market participant doctrine doesn’t stretch this far. Its decision in South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82 (1984), allows a state to impose burdens on commerce within its own state but may not impose conditions that have a substantial regulatory effect outside the state. That’s precisely what these blacklist laws do. They are designed to regulate activities outside the state!
Left unchallenged, these blacklist laws will eventually trigger retaliatory blue state blacklist laws to advance clean energy and ESG goals and penalize companies and industries that thoughtlessly damage the environment and planet - just the kind of interstate economic warfare the Constitution’s Commerce Clause is intended to outlaw.
