Texas’ Answer to ‘Woke’ Investing Looks Kind of Woke

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One of the more surprising aspects of Texas’ anti-ESG law, just unleashed on the likes of BlackRock Inc., is that it turns out to offer a great lesson on environmental, social and governance investing’s cousin, socially responsible investing, or SRI. Not intentionally, of course.

ESG investing is often conflated with SRI. Both get lumped together as financial piety or under that term now so overused and abused your dad probably says it, “woke.” They are not the same thing. SRI is based on values and most commonly exclusionary: “I don’t want to fund X undesirable sector, so I won’t give it my money.” ESG is based on risk and more nuanced: “I foresee risks related to ESG issues that may either impair or enhance a security’s value, take account of measures to address those, and then under or overweight it accordingly.” SRI is about maximizing virtuousness; ESG is about maximizing wealth.

Can ESG labels be used to mask other intentions? Of course; as with any other investing theme, there is ample potential for hucksterism or simple sloppiness. Even Larry Fink, BlackRock’s chief executive officer, has been known to mix up ESG with SRI.

And now so is Texas, in an interesting twist on the theme. Under Senate Bill 13, which came into effect almost a year ago, the state comptroller drew up a list of financial firms deemed hostile to fossil-fuel producers, which will now face obstacles, or outright exclusion, to doing business with state and local entities, such as raising municipal bonds. In theory, the law punishes Wall Street firms with ESG policies that might, for example, lead them to hold off making loans to an oil producer.

In practice, that is true to an extent: Big financial firms would rather not lose any business in the country’s second-largest economy. But also in practice, the law is replete with loopholes that may blunt the impact; one allows state pension funds not to divest any holdings involving the proscribed firms if it would hurt their performance. That’s kind of a big one and gets to the interesting twist. Because what Texas is doing here is akin to SRI.

There is a tiresome tension in the way the law operates — if that word can be used — in that the banned firms say they are using ESG in the proper sense to manage risk while Texas officials dismiss it as merely imposing leftist values. In doing so, the state has effectively adopted that dexterous feat of simultaneously covering its eyes and putting its fingers in its ears.

Because even if one doesn’t like the idea that a chief industry in one’s state — oil and gas — faces existential risk from efforts to curb climate change, that situation is impossible to deny. That is precisely why the biggest oil and gas firms residing there don’t deny it anymore. In a delicious bit of timing, the same day Texas released its version of the index prohibitorum, it emerged that California would ban gasoline-powered cars by 2035. Now one can, of course, say that policy is misguided or too costly; that is a valid debate. But to say that firms lending to or investing in the oil industry shouldn’t factor in the biggest car market in the US — which also sets the regulatory agenda in many other states — banning the biggest source of demand for oil is simply delusional.


Or, put another way, it is a values-based boycott. Just like SRI. And just like SRI, by constraining the options of Texas’ pension funds and muni issuers, it will incur a cost. That is how SRI works: You withhold dollars and thereby raise the cost of capital for your chosen target but, in doing so, take a hit to your own risk-adjusted returns (see this). In Texas’ case, another law aimed at firms shy of doing business with gun manufacturers has cost its taxpayers half a billion dollars already, according to a paper published this summer. Did I compare these laws to socially responsible investing? Fiscally irresponsible invective might be nearer the mark.


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