(Bloomberg) -- Lawmakers in Oklahoma are having second thoughts about anti-ESG legislation that limits which Wall Street banks local governments can do business with. 

A Republican-introduced bill that would narrow the scope of a state law that blacklisted financial firms for their restrictions on lending to oil, gas and coal companies, is making its way through Oklahoma’s legislature.  

The proposal comes as concerns mount that the 2022 law is driving up municipalities’ borrowing costs in the state. Three major municipal-bond underwriters — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — are on a state list of companies considered to “boycott” the fossil fuels industry. 

A new study published Monday from the Oklahoma Rural Association — a group representing smaller communities — found that the state is incurring “avoidable” costs as a result of the law.  

According to Oklahoma’s Energy Discrimination Elimination Act, state agencies and political subdivisions can’t contract with a company unless it provides a written verification that it doesn’t boycott energy companies. In the 17 months since the law went into effect it’s cost the state and its governments $185 million in additional expenses, the study estimated.

“This increase in borrowing costs imposes an unnecessary financial burden on Oklahoma municipalities, potentially forcing them to cut spending on important public services or infrastructure projects, or raise taxes,” according to the report’s author, Travis Roach, an economics professor at the University of Central Oklahoma. The estimate is conservative, he noted. 

The GOP stronghold is one of a handful of US states, including Texas, that enacted legislation targeting environmental, social and governance corporate policies in recent years, driving upheaval in local muni markets. Bank of America, Wells Fargo and JPMorgan are among the six companies considered energy boycotters by Oklahoma’s Republican State Treasurer Todd Russ. Since the law went into effect, the firms have seen their public finance business in the state dry up.

Bank of America was Oklahoma’s top muni bond underwriter in 2021 and has since ceded its spot to Robert W. Baird & Co., according to data compiled by Bloomberg. JPMorgan and Wells Fargo – also once major underwriters in Oklahoma — have also seen their public finance business there dwindle. 

‘Free Market’ Barrier

Roach’s study compared the average coupon rate on muni bonds sold in Oklahoma against those of states without a similar law. He found that Oklahoma’s coupon rates are now 59 basis points higher than they would have been if the law didn’t pass. 

“This number will continue to grow for as long as the EDEA policy restricts municipalities from participating in a free market and selecting banks that meet their economic needs,” he said. 

Oklahoma’s Senate Bill 1510, would rein in the energy law so it only applies to state agencies and no longer applies to cities and counties. 

The bill was introduced by Republican state senator Chuck Hall, who is the chief executive officer of Exchange Bank and Trust Co. He told the Oklahoma Voice that he didn’t think the law should pre-empt local decision-making. The legislation has advanced to the state house. 

John Collison, director of the Oklahoma Rural Association, said that the bill is a “step in the right direction” and the group hopes it passes. Still, he said he would like to see more work done on the issue.

“The ideal outcome would be to get back to where we were two years ago and let the lending institutions lend to cities and municipalities and the state of Oklahoma at the best rate possible,” he said.  

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