Dive Brief:

• Texas’ comptroller Wednesday placed BlackRock, BNP Paribas, Credit Suisse, UBS and six other financial firms on a list of companies that “boycott” the fossil-fuel sector — a move that requires state pension funds to divest from the companies. A list of 348 mutual funds was also marked for divestment.
• “The environmental, social and corporate governance (ESG) movement has produced an opaque and perverse system in which some financial companies no longer make decisions in the best interest of their shareholders or their clients, but instead use their financial clout to push a social and political agenda shrouded in secrecy,” Glenn Hegar, the Republican comptroller, said in a statement.
• Funds such as the $200 billion Teacher Retirement System now have 30 days to report their direct and indirect holdings with the listed companies. Listed companies, meanwhile, have 90 days to convince the state they don’t boycott fossil fuels. 

Dive Insight:

Wednesday’s move comes roughly a year after Texas enacted a law limiting state and local governments from entering into certain contracts with firms that have de-emphasized their relationships with carbon-heavy energy companies. Hegar in March and April sent surveys to more than 150 companies, seeking data on whether they were snubbing the oil and gas industry — for which Texas is the nation’s leading producer — either with goals to limit ties to the sector or by migrating to sustainable investing. That prompted municipal bond issuers in the state to keep at arm’s length some of the financial firms that had been queried.

Hegar’s office used corporate ESG ratings from MSCI to whittle the list of 150 down to 19 target companies, which were invited to explain their position on fossil fuels. Some provided information that satisfied the state’s concerns, Hegar told the Financial Times. Those that did not, or failed to respond, made the final list of 10.

“This research uncovered a systemic lack of transparency that should concern every American regardless of political persuasion, especially the use of doublespeak by some financial institutions as they engage in anti-oil and gas rhetoric publicly yet present a much different story behind closed doors,” Hegar said, adding he limited his review to energy-related business rather than the entire ESG movement.

Hegar said he found particularly intriguing what he called “misguided activism surrounding proxy voting.” 

“Some of these firms may be using investments essentially owned by Texas to directly push shareholder initiatives that run contrary to the interests of our state,” he said.

U.S. banks absent

Largely missing from the “boycott” list are U.S.-based finance firms. BlackRock stands as the only domestic company on Wednesday’s list. BNP Paribas is based in France; UBS and Credit Suisse in Switzerland. The other six firms are Nordic — Danske Bank, Nordea Bank, Swedbank and Svenska Handelsbanken — or British (Schroders and Jupiter Fund Management).

Most top U.S. investors lobbied hard to be off the list, Reuters reported, though one JPMorgan fund was included, in addition to some from Vanguard and State Street.

“This is not a fact-based judgment,” BlackRock said in a statement, according to the Financial Times. (Update: The company’s chief client officer, Mark McCombe, would offer more extensive comments Thursday.)

BlackRock has invested more than $100 billion in Texas energy companies, and its managed funds are the second-largest shareholder in ExxonMobil, the company noted. 

"Elected and appointed public officials have a duty to act in the best interests of the people they serve," BlackRock said in a statement. "Politicizing state pension funds, restricting access to investments, and impacting the financial returns of retirees, is not consistent with that duty.”

Texas’ Teacher Retirement System holds about $28.2 million worth of BlackRock shares, according to S&P Global.

UBS objects to being placed on the list, a spokesperson for the bank told Reuters. "We provided their office with extensive information on our policies and practices, demonstrating that UBS does not boycott energy companies even under a broad interpretation of Texas law,” the spokesperson said.

Credit Suisse "is not boycotting the energy sector as the bank has ongoing partnerships and strong client relationships in the energy sector," a spokesperson told Reuters. "We look forward to engaging with the Texas Comptroller to resolve this matter.”

BNP Paribas did not immediately respond to a request for comment from The Wall Street Journal.

Other state action

Texas is not the only state to restrict finance firms’ business over their energy policies. Florida on Tuesday passed a resolution banning its pension fund managers from taking ESG considerations into account with their investing strategies.

West Virginia last month said it would no longer award state contracts to JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley and BlackRock over the companies’ decisions to cut back on financing to coal companies.

BlackRock is a common target for states considering contract restrictions. Nineteen state attorneys general, including Texas’, wrote a letter this month accusing CEO Larry Fink of pursuing sustainable investments instead of shareholders’ profits, according to Bloomberg. 

Hegar told the wire service that governmental entities should use his list as a “filtration system” when entering contracts. 

Texas’ law does not affect the listed companies’ investment management contracts with state pension funds. Future contracts, however, must include a statement that the company “does not boycott energy companies,” Texas said, according to the Financial Times. 

Under the law, state pension funds must submit a report each year by Jan. 5 identifying all securities sold, redeemed, divested or withdrawn. The comptroller’s office will continue its review, and the “boycott” list may be updated quarterly, it said Wednesday.

Texas’ law allows for divestments to take place over time and provides carve-outs so the state doesn’t lose money, according to The Wall Street Journal.

“My greatest concern is the false narrative that has been created by the environmental crusaders in Washington, D.C., and Wall Street that our economy can completely transition away from fossil fuels,” Hegar said. “A complete divestment of the industry is not only impractical and illogical but runs counter to the economic well-being of Texas and our citizens.”