Dropping Citigroup from Muni-Bond Deal Deepens Texas' Two-Step on ESG

State's largest-ever municipal bond deal removes banking giant as underwriter

A sign that says "Citi."

Michael M. Santiago / Getty Images


  • Texas reportedly dropped Citigroup from muni-bond deal over the financial institution's gun stance.
  • Texas earlier removed UBS as an underwriter from the planned $3.4 billion issuance.
  • Two years ago, the state pioneered restrictions against companies with certain ESG stances when they refused to do business with firms that avoided fossil-fuel investments.
  • Several other states have since enacted or proposed similar legislation.

Texas' decision to drop Citigroup Inc. (C) from a massive municipal bond deal is the state's latest reprisal against businesses it deems to be promoting social or environmental agendas.

The state's attorney general's office, led by Ken Paxton, determined last month that Citigroup "discriminates" against the firearms industry, and prohibited it from underwriting most bond deals in the state.

That led to to the state's decision last week to void the firm as an underwriter on the planned multi-billion dollar muni-bond issuance, the largest in its history.

The edict appears to broaden the state's 2021 law prohibiting state and local agencies from investing or doing business with firms that refuse to invest in fossil fuel producers. That law has led numerous state funds to divest holdings in certain asset managers, including the world's largest, BlackRock (BLK).

It's also the latest broadside against proponents of environmental, sustainable and governance (ESG) criteria. In the past decade, banks, asset managers and other businesses increasingly have used such factors to target what they consider favorable business practices or investments while avoiding unfavorable ones.

Texas is Pioneering the Push Against ESG Firms

Responding to the latest decree, the Texas Natural Gas Securitization Finance Corp. last week removed Citigroup from the underwriting syndicate on the $3.4 billion bond deal sponsored by the Texas Public Finance Authority.

It marks the second time the state has dismissed a member of the original underwriting group that was announced in May.

Four months ago, Texas nixed UBS Group AG's (UBS) participation in the bond issuance after the firm apparently violated of the 2021 law. The issuance was intended to raise funds for natural gas utilities that suffered financial losses from a massive winter storm in February 2021.

Texas made headlines when its Republican-led legislature and Gov. Greg Abbott approved the 2021 law. Paxton—also a Republican and staunch conservative who Friday agreed to a $3.3 billion settlement with four former high-level aides accusing him of bribery and abusing his office — supported it.

Citing the law, the state's comptroller, Glenn Hegar, banned state and local entities from doing business with BlackRock and nine other financial firms in August. Those firms include BNP Paribas, Credit Suisse AG, UBS, and Schroders PLC.

Hegar also disallowed state and local stakes in ESG funds targeting sustainable investments. The Teacher Retirement System of Texas, the 20th-largest pension plan in the world with about $160 billion in assets, said late last year it has divested all holdings on Hegar's list.

Many States Are Following Texas' Lead

Several other states have followed Texas' lead, either adopting or proposing laws targeting investments or doing business with firms that purportedly take pro-ESG stances.

Idaho last year banned companies from considering ESG factors in making investments. West Virginia prohibited the state from doing business with firms that avoid companies for ESG reasons.

In addition, Oklahoma's Energy Discrimination Elimination Act, adopted last year, mirrors Texas' prohibition against anti-fossil fuels firms, and Florida late last year pulled $2 billion from BlackRock because of the state's objections to the firm's investments in sustainability.

Arizona, Kentucky, North Dakota, Ohio, and Wyoming have enacted similar legislation, and Utah is considering it. Meanwhile, the attorneys general of 19 states sent a letter to BlackRock CEO Larry Fine in August criticizing the firm for relying on ESG criteria in managing state pension funds.

ESG investing has become increasingly popular in recent years, particularly in Europe. Assets have flowed into ESG funds, with more asset managers using ESG criteria when considering individual company investments.

Cash inflows into ESG funds fell dramatically last year, however, amid stress throughout global financial markets. Meanwhile, ESG investing has received mounting criticism for middling returns and high fees.

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  1. Bloomberg. "Citi Dropped from Texas $3.4 Billion Muni Deal on Gun Policy"

  2. The Texas Tribune. "Texas bans local, state government entities from doing business with firms that 'boycott' fossil fuels"

  3. CNN. "Texas Attorney General Paxton agrees to $3.3 million settlement with whistleblowers who accused him of abuse of office and bribery"

  4. Teacher Retirement System of Texas. "Investment Teams."

  5. The Texas Tribune "Texas' teacher pension fund divested from investment firms accused of 'boycotting' oil and gas industry"

  6. Market Realist. "States Are Pushing Anti-ESG Bills -- There's Plenty At Stake"

  7. KFOR.com "Bill to limit who the state does business with signed into law"

  8. Fast Company. "These states are trying to ban ESG investing"

  9. The Wall Street Journal. "‘Green’ Funds Cost Three Times More Than You Think."

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