West Virginia goes after banks on fossil fuels
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Key Findings
Several states recently passed laws targeting banks and investment houses seen as hostile to the fossil fuel industry as part of a broad, coordinated attack on policies and entities supporting solutions to climate change.
Offending financial services companies will be barred from competing on contracts for state banking services and pension fund management. Banks may also be the targets of pension fund divestment.
The basis of these laws is specious and their implementation leaves states vulnerable to lawsuits. This is a recipe for arbitrary and capricious government misconduct that opens the door to legal challenges.
The good news is that banks and other financial services companies have a strong case to reverse this misguided initiative.
Executive Summary
Several states have recently passed laws that target banks and investment houses seen as hostile to the fossil fuel industry. Offending financial services companies will be barred from competing on contracts for state banking services and pension fund management. The banks may also be the targets of pension fund divestment. The laws are part of a broader and coordinated attack on policies and entities supporting solutions to climate change. The attackers argue that fossil fuel divestment is an abusive policy instrument based on ideological prejudices. But the basis of these laws is specious, and their implementation leaves these states vulnerable to lawsuits. Banks and other financial services companies have a strong case to reverse this misguided initiative.
Although the various statutes take slightly different paths, all are aimed at punishing banks and investment houses for using lending and investment criteria that purportedly harm the fossil fuel industry. The determination to punish financial services companies is typically carried out by a state finance officer. The officer is usually required to report negative findings about financial services companies to various public finance agencies (pension funds, treasurers, procurement officers), who are instructed to initiate a divestment or contract prohibition.
For the purpose of understanding the impact of these policies and state laws, this commentary reviews a prime example, the West Virginia statute, and subsequent follow-up actions by the state’s treasurer, Riley Moore.
How the West Virginia Statute Works
West Virginia adopted legislation (S.B. 262) in 2022, requiring the state treasurer to develop a target list of financial services companies that potentially are boycotting the energy sector, defined in the statute specifically as the fossil fuel sector. The state treasurer is directed to notify those companies that they are on a list and are at risk of being denied the right to participate for banking service contracts; solicit the views of the targeted companies; and review the responses and other publicly available data. The treasurer then makes final a determination as to whether each targeted financial services company is boycotting energy companies.
Once the treasurer has determined that a financial services entity is boycotting an energy company, the offending company is placed on an official list posted on the treasurer’s website. The treasurer may bar any listed financial company from competing for certain banking services contracts. The law in West Virginia exempts contracts with the West Virginia Investment Management Board, which is the state pension fund.
To date, the West Virginia treasurer has issued exclusion notices to five companies: BlackRock, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo.
