The stage has been set for conflicts over the financing of oil, gas, and coal operations as the idea of boycotting or disinvesting in those industries has gained momentum.
President Biden has made climate change a central issue of his administration, and it is widely feared—or hoped, depending on perspective—that his federal regulators will pressure banks to stop lending to the fossil fuel sector. Observers have warned of possible activism from the Federal Reserve, the Securities and Exchange Commission (SEC), and the Federal Comptroller of the Currency to discourage such financing.
Republican senators Feb. 15 delayed a Senate Banking Committee vote on the nomination of Sarah Bloom Raskin to the Federal Reserve board of governors. Raskin has advocated that financial regulators adopt policies that, in her words, “will allocate capital and align portfolios toward sustainable investments that do not depend on carbon and fossil fuels.”
Some prominent financiers, most notably the chief executives of investment management firm BlackRock Inc. and banking firm Citigroup Inc., have said they may reduce financial support for fossil fuel companies to meet their goals on limiting greenhouse gas emissions.
States with substantial oil, gas, and coal production have responded. Texas passed a law last year to prepare state agencies to pull money out of institutions that engage in what is considered a boycott of oil, gas, or coal companies and related companies. Financial officials of 15 states in late November sent an open letter to banks warning them of penalties if they boycott traditional energy industries.
In late January, the tensions went beyond rhetoric. West Virginia State Treasurer Riley Moore said his department’s management of roughly $8 billion in state operating funds will no longer use a BlackRock investment fund as part of its transactions.
West Virginia takes action
Moore told Oil & Gas Journal that financial companies leaning toward disinvestment in natural gas and coal will find states pulling their own substantial financial resources out of those banks or money managers.
“If they want to continue down this road, that’s exactly what’s going to happen,” he said.
Natural gas, thanks to Marcellus and Utica shale gas, has become important to West Virginia, and Moore said, “We are going to defend that industry and our jobs and our economy in any way we can.”
The threat of disinvestment is not just rhetoric, he said, explaining that it is showing up in the “environmental, social, and governance” (ESG) statements of numerous financial institutions.
In response to warnings from state officials that they will defend their energy industries, “there have been some banks that have softened their posture,” he said.
West Virginia lawmakers are moving to arm Moore with additional authority to penalize banks. A bill, SB 262, has been written to allow Moore to list financial institutions that the state will no longer do business with because of what is considered disinvestment—or advocating and moving toward disinvestment. Public statements by executives will be usable as policy for listing the institutions.
The bill was passed overwhelmingly by the state senate and has been moving quickly though the state house of delegates, and Moore expressed confidence it would become law.
Moore stressed that he does not want a fight. He said he wants the free market to allocate capital without political pressures to disfavor an industry.
Federal political risks
The SEC, the Federal Reserve, and the Federal Comptroller of the Currency (a Treasury Department officer) all could play a role in a Biden administration campaign.
The SEC could use its risk disclosure requirements to increase demands on publicly traded companies that they communicate at length about risks from climate change and the political risks of legislative and regulatory steps promoting an “energy transition.”
Simply the listing of those risks can make a difference by making investors more cautious, more demanding of better return for more risks, said Kevin Book, managing director of ClearView Energy Partners LLC, a research firm that focuses on energy risks for financial investors and corporate strategists.
“It could create perceptions of risk that are greater than they actually are,” Book told Oil & Gas Journal. “I don’t think we should assume disclosure is a benign thing.”
He noted as an example that pension funds commonly aim for low-risk, long-term investments.
The federal regulatory risks for oil and gas companies depend in part on how much the regulators want to push the Biden agenda, and that can mean large or small actions, Book said.
Book said it remains to be seen how aggressive the regulators will want to be, but the subject obviously is on the table this year for the SEC, as indicated by remarks of SEC Chairman Gary Gensler.
Banking regulators can require more difficult stress tests that measure a bank’s ability to cope with difficult circumstances, Book said. Regulators also can establish new reserve or margin requirements that tie up more capital in reserve, reducing the financial rewards of loans to oil and gas companies.
Private action, state action
Oil and gas companies over the past few decades have increasingly teamed up with private equity firms to finance operations. If many financial firms like BlackRock and Citigroup pull back from oil and gas, they may be replaced by other private money happy to fill in the financial gap and glad they don’t have to compete with giants like BlackRock.
Bruce Niemeyer, vice-president of strategy and sustainability at Chevron Corp., remarked at a Feb. 9 Bipartisan Policy Institute event, “Divestment just changes who owns assets.”
The investors in oil and gas also could end up outside US jurisdiction, however. There may be less accountability in other countries, especially with sovereign energy companies, Book said.
For banks, the pushback from states poses various risks. Bills to deter fossil fuel boycotts have been introduced not only in West Virginia and Texas but Oklahoma, Indiana, and Kentucky.
“All of these bills are a little bit different,” said Neelesh Nerurkar, a vice-president of research at ClearView Energy Partners. “Texas is so far the only one to pass a bill.”
Several states may be watching to see how implementation of the new Texas law works out, Nerurkar said. The Texas state comptroller is still figuring out how to implement the law, SB 13, which was signed by the governor in June and took effect Sept. 1.
The comptroller will have to determine what companies to list as boycotters and how to impose sanctions. The new law requires state agencies to move pension funds and the money of a big state school fund away from boycotters. Hundreds of billions of state funds are at stake.
ClearView has added up the cash and securities held by states and said it amounted to $7.6 trillion as of 2019. Of that, about $1.44 trillion was held by the 15 states whose officials signed the warning letter to banks in November.