Regulating state banks becomes a new front in the war on fossil fuels | Bradley Arant Boult Cummings LLP


West Virginia recently became the second state to pass financial regulations designed to stave off efforts to block fossil fuel companies from accessing banking services — but it looks like it won’t be the last. On March 30, 2022, West Virginia Senate Bill 62 became law, requiring all branches of state government to cease doing business with any bank or investment firm engaged in a “boycott” of fossil fuel companies.

More importantly, the law prohibits any institution that boycotts fossil fuel companies from managing state pension fund investments. Even before the law was enacted, coal-rich West Virginia had already removed some assets from an investment fund managed by BlackRock following reports that BlackRock was advocating that companies adopt measures to limit carbon emissions.

Texas the model for states protecting fossil fuel companies

West Virginia’s new law follows in the footsteps of Texas, which last year passed a bill requiring its comptroller to compile a list of all financial firms that boycott energy companies. Any “financial company” – a category that includes any “publicly-listed financial services, banking or investment company” – engaging in such a boycott is subject to divestment from the pension systems and school funds of the State. These funds total approximately $273 billion in assets.

Last month, Texas Comptroller Glenn Hegar began his enforcement efforts by sending letters to 19 companies (including BlackRock) asking for “clarifications” on their fossil fuel investment policies. Hegar said at least 100 other companies will receive similar letters. Under Texas law, companies have 60 days to respond or the state will presume they are engaging in a fossil fuel company boycott. The course of this process deserves particular attention.

A national battlefield

The story in every state passing anti-boycott laws is the same. Fossil fuel companies are facing climate activism channeled through the increasingly common use of ESG (environmental, social and governance) criteria in investments. According to a database that tracks fossil fuel divestments, government, nonprofit and for-profit institutions have collectively divested $40.43 trillion in assets to fossil fuel companies. Legislators understandably want to protect this sector of their states’ economy from harm that could result from fossil fuel companies running out of capital.

Notably, under these laws, “boycott” is broadly defined, including any “action to penalize, inflict economic harm or limit business dealings with” fossil fuel companies. Therefore, the scope of financial sector activity that might be sufficient to trigger anti-boycott laws is uncertain.

Legislatures in several other states, including fossil fuel-rich Louisiana and Oklahoma, are currently considering similar bills. These types of legislation promise a convoluted patchwork of different state requirements for financial firms when it comes to investing in fossil fuel companies. And if that weren’t enough, other states are pushing in the opposite direction, considering laws to require their public pension and retirement funds to avoid investing in fossil fuel companies. Maine enacted a fossil fuel divestment law last year, and lawmakers in Virginia and New York have proposed similar laws.

A path through the regulatory jungle?

For now, it looks like one set of states will focus on distancing their capital from financial institutions that boycott fossil fuel companies, while another set will work to divest from fossil fuel companies. fossils themselves. As a result, financial institutions may be able to meet the requirements of both sets of laws by not boycotting fossil fuel companies. This path may allow them to avoid choosing sides and continue to do business with both sets of states, but banks and financial firms would be well advised to familiarize themselves with the requirements of each law when considering fossil fuel investment policies.


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