The popularity of socially responsible investing in areas such as affordable housing has run headlong into the nation’s culture wars in Texas.
Four leading municipal bond underwriters recently chose to pull out of the Lone Star State’s municipal bond market — among the biggest in the nation — on the heels of two laws that went into effect in September.
Texas Senate Bill 19 (SB 19) requires companies doing business with state agencies, including bonding authorities, to certify that they do not “discriminate against the firearm or ammunition industries,” according to a research report issued by the Kroll Bond Rating Agency. SB 13 similarly seeks to protect Texas’ energy industry by barring “state investments in companies that restrict business activities with the oil and gas industry,” Kroll reports.
In reaction to SB 19, JPMorgan Chase, Citigroup and Bank of America recently elected to pause participating in the Lone Star State’s municipal bond market because “they could not certify compliance with the new law,” according to Kroll. All three have adopted investment or other policies in the wake of mass shootings that set restrictions on the firearms industry. A recent report by Bloomberg indicates Goldman Sachs, likewise, has elected to pause activity in the Texas’ municipal bond market.
The affordable-housing market in Texas is supported, in part, by tax-exempt bonds issued by the Texas Department of Housing and Community Affairs (TDHCA) and the nonprofit Texas State Affordable Housing Corp. (TSAHC). Their programs help to fund first-time homebuyer initiatives as well as single-family and multifamily affordable-housing projects, among other efforts.
TDHCA as of August 2020 had a total of $738 million in single-family and more than $1 billion in multifamily bond indentures outstanding, according to the state agency. TSAHC reports that since 2001, it has issued “more than $730 million in multifamily tax-exempt bonds to help build or preserve affordable rental housing in Texas.”
“Affordable-housing finance has been an important part of the ‘E’ in ESG— environmental, social and governance — investing for more than 15 years,” said Geoff Proulx, managing director and co-head of the Affordable Housing and Community Development Group at Morgan Stanley. “Now the ‘S’ is emerging as a driver of demand for those interested in investing in affordable housing.”
Proulx is quoted in a Morgan Stanley report that highlights the rising importance of socially responsible investing. The report, published in July, notes that in 2020, “green, social and sustainability bonds,” including bonds for affordable housing, raised in excess of $600 billion from investors, nearly twice the 2019 mark of $326 billion.
The new Texas laws, then, run headfirst into the ESG investing trend by requiring banks doing business with state and local agencies to essentially pledge allegiance, under penalty of law, to the gun and oil industries. That strong-arm approach prompted the exodus of top underwriters from the state’s municipal bond market.
One source in the banking industry familiar with the situation said it’s likely none of the underwriters is happy about having to pull back business in Texas because of the new laws and would like to re-engage in the state. But, for now, they have little choice but to pause.
As a state agency, TDHCA is bound by the new laws, and its future bond issues. Consequently, it will be impacted by the exodus of major market-makers for its bond issuances, and by extension the affordable-housing market in Texas will be affected. Whether that translates into less demand and higher rates for its bond issues over the long-term remains to be seen.
“The effects of stakeholder preferences on ESG issues can affect the demand for an issuer’s product and services, the strength of its global reputation and branding, its relationship with regulators, and importantly, the cost of and access to capital,” the Kroll report states. “… Across the broad landscape of corporate, financial institution and government issuers, these stakeholders can include voters, investors, customers, employees and regulators, among others.”
Kristina Tirloni, spokesperson for the state-run TDHCA, declined to comment on how the new laws and subsequent retreat of major underwriters might affect the agency. TSAHC’s programs, however, will not be impacted by the provisions of the new laws, according to spokesperson Katie Howard Claflin.
“The Texas State Affordable Housing Corporation is a nonprofit corporation and therefore exempt from the provisions of SB13 and SB19,” she wrote in an email response to HousingWire. “We have confirmed with our bond counsel that these provisions will have no effect on our programs.”
None of the underwriters who exited the Texas muni market responded to requests for comment, other than JPMorgan Chase and Goldman Sachs, who each had a “no comment” for this story.
Bloomberg reported that a number of other underwriters have been willing to certify they will comply with the new laws supporting the firearms and oil and gas industry in Texas. They include Barclays Plc, TD Securities, Stifel Financial Corp. and Wells Fargo & Co., among others.
The takeaway for the municipal bond market, underwriters and affordable-housing agencies in Texas, according to Kroll’s research report?
“Texas SB 19 highlights [that] stakeholder preferences can often be competing and can vary greatly by geographic location,” the Kroll report states. “From the viewpoint of Texas politicians and regulators, they are protecting an industry critical to the state and its voters, while Citigroup, J.P. Morgan and Bank of America [and more recently Goldman Sachs] are integrating their customers’ and stakeholders’ ESG [socially responsible investment] preferences by restricting funding to certain controversial industries, such as firearms, oil and gas, and tobacco.”
So, both the state-run TDHCA and the private-sector TSAHC, for now, are cut off from the underwriting services of J.P. Morgan, Citigroup, Bank of America and Goldman Sachs. That’s the case because the investment banks have decided to pause underwriting in Texas’ municipal bond market — even though TSAHC is not bound by the new laws, its spokesperson says.
That lost opportunity has opened up new opportunities in the Texas municipal bond market for players not wedded to the socially responsible, or ESG, investment movement, which Morgan Stanley says has been elevated by “the focus on racial and economic justice during the pandemic.”
The irony is that some of those new rising underwriters that are complying with the new, restrictive Texas laws will now be helping to market bonds to expand affordable housing, which falls squarely in the scope of socially responsible investing. Kroll also notes that since enactment of the restrictive laws in Texas, overall bond deals for a host of infrastructure and other projects have not slowed — with 118 bond sales since September 1 totaling $3.52 billion.
“ESG stakeholder preferences are complex as there are often competing interests at work that may represent risks or opportunities for issuers, now or in the future,” the Kroll report concludes.