A decision last week by the U.S. Supreme Court not to hear a case out of Arkansas could fuel more legislative attempts to cut companies off from doing business, including municipal bond underwriting, with state and local governments if their policies are considered harmful to certain industries. 

The litigation challenged a 2017 Arkansas law requiring government contractors to certify they do not and will not participate in boycotts of Israel.

That statute, which exists in other states, was a forerunner to recent legislative moves to punish companies deemed to be “boycotting” or “discriminating” against the fossil fuel and firearm industries in a mostly red state backlash against the use of environmental, social, and governance factors to evaluate investments.

With the Supreme Court declining to weigh in, an Eighth Circuit U.S. Court of Appeals decision finding the First Amendment protects speech and association in support of a boycott, but not economic decisions against the target of a boycott, remains in place.

“I think a lot of legislators are going to interpret that as a green light to plow ahead with the increasingly expansive and probably increasingly draconian anti-boycott legislation,” said Brian Hauss, senior staff attorney with the American Civil Liberties Union’s Speech, Privacy and Technology Project, who served as counsel of record in the Arkansas case. 

The ACLU filed the lawsuit on behalf of Little Rock-based Arkansas Times, an alternative newspaper that refused on principle to sign anti-boycotting certification as a condition for renewing advertising contracts with the University of Arkansas Pulaski Technical College. 

The federal appeals court affirmed a district court’s dismissal of the case on the basis the law’s motive was primarily economic, with lawmakers “repeatedly” expressing concern for the commercial viability of companies refusing to do business with Israel and the impact that could have on the state’s finances due to having “risky” contracting partners because they don’t have access to Israeli innovations.

Hauss said the proliferation of anti-boycott bills won’t be limited to Republican-controlled states. 

“If eventually everyone’s kind of convinced the Supreme Court is not going to enforce the right to boycott, then I think you’re going to start seeing both sides attempting to pass legislation that suppresses boycotts of interests they want to protect,” Hauss said. 

A recently introduced California bill would prohibit banks with business customers that manufacture firearms from working on every aspect of the state’s public finances including municipal bonds, capital projects, and the state’s debt portfolio.

Two 2021 Texas laws aimed at protecting the energy and firearm industries from boycotts and discrimination resulted in UBS and Citigroup being banned from underwriting state and local government bonds in that state due to their policies related to climate change or gun and ammunition sales. 

The laws prohibit state and local government contracts with offending companies for goods and services worth $100,000 or more.

Similar bills have popped up in other states this year, along with expanded bills written to target companies deemed to be “boycotting” industries that include timber, mining and agriculture, and are found to ”boycott” businesses that do not adhere to environmental emission standards, do not meet or commit to meet corporate board or employment criteria addressing diversity, or do not facilitate access to abortions, sex or gender change, or transgender surgery.

The measures largely mirror model legislation the conservative Heritage Foundation posted on its website, advising states they “can enact legislation that generally requires companies that contract with the state to certify that they do not boycott or discriminate against companies to achieve woke political objectives.”

The scope of what investment banks are not allowed to do will likely continue to expand if the goal of lawmakers is to ensure anyone doing business with their state is in complete alignment with their values, according to Justin Marlowe, a research professor at the University of Chicago’s Harris School of Public Policy.

“That’s the crossroads that a lot of underwriters, if they’re not there yet, I think they’re going to find themselves there very soon,” he said. “If that landscape shifts, especially in the absence of any kind of a Supreme Court precedent or some broader streamlining, is it going to continue to be worth the time and effort to try to fit into this ever-changing landscape? Some firms will say ‘no.'”

The potential financial consequences have yet to be seen, although that could quickly change, Marlowe said.

With issuance down, underwriters are “probably willing to jump through some hoops they otherwise wouldn’t be able to jump through” for issuers’ bond deals, he said, adding when volume returns to more normal levels, the consequences may become more apparent.

A study last year found the Texas laws may increase borrowing costs for issuers in the state as a result of less competition among underwriters.

A subsequent study by Econsult Solutions Inc. looked at the impact if similar bills were enacted in six other states, finding they could collectively face more than $700 million in additional costs. 

Utah State Treasurer Marlo Oaks, a vocal ESG critic, testified this month on behalf of a state bill that would require companies to certify in writing they are not engaged in an expanded list of boycotts as a condition for state and local government contracts.

He said banks and other financial institutions were signing net-zero climate pledges, impacting the flow of capital to oil and gas projects, which hurts Utah’s economy.

“We do not want to do business with entities that may be harming us as a state,” he told the Utah Senate Business and Labor Committee. “This is really aimed at institutions that are weaponizing their business.

The bill passed the Senate in a 20-6 vote last week and is pending in the House.

Lawmakers in Arizona and Oklahoma are trying again to pass bills targeting firearm industry discrimination.

In Oklahoma Senate debate last year, Sen. Casey Murdock, the bill’s sponsor, called out Citigroup, BofA, Goldman Sachs, and JP Morgan Chase for their “discriminatory” policies.

Some banks adopted firearm policies in 2018, after a gunman killed 17 people at a Florida high school, with Citigroup announcing a U.S. commercial firearms policy that requires new retail sector clients to adhere to “best practices” of prohibiting firearm sales to someone who has not passed a background check or is under age 21, and not selling bump stocks or high-capacity magazines. BofA said it would halt financing for companies that manufacture military-style weapons for civilians. 

Oklahoma’s new treasurer, Todd Russ, has sent questionnaires to more than 100 financial institutions, including BofA, JP Morgan Chase, and investment affiliates of Robert W. Baird & Company and RBC, as he implements a 2022 state law directing his office to compile a list of fossil fuel boycotters for divestment purposes by state retirement systems, as well as for state and local government contract prohibitions.

Hauss said the U.S. Supreme Court could take up the constitutionality of these laws if they are challenged and another federal appeals court comes back with a different interpretation. 

“Given the proliferation of anti-boycott legislation, I think that conflict is probably inevitable,” he said.

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