Chris Prentice

WASHINGTON (Reuters), – Two sources familiar with this matter claim that the U.S. Securities and Exchange Commission has begun a preliminary inquiry into how lenders have disclosed their positions on key issues, such as gunmakers and climate change.

According to sources, this inquiry seems to be related to Texas laws that prohibit state agencies from cooperating with businesses discriminating against fossil fuel or firearm companies.

Under pressure from employees and investors, banks are now active in environmental and social governance (ESG). They have eschewed gunmakers, supported racial equity initiatives, and pledged to end fossil fuel borrowing. It has provoked a backlash from Republican lawmakers, who worried that some sectors may be denied credit.

The SEC’s Democratic new leadership has, in the meantime, pledged to take action against public companies who may have inflated their ESG credentials to draw investors or burnish their reputations, as well as those that might be underplaying similar risks.

Enforcement staff at the SEC’s Fort Worth office in Texas have sent letters to banks in recent weeks asking for documentation on ESG policies.

Sources said that the SEC is looking into potential conflicts between statements made by underwriters to investors and Texas regulators concerning their policies regarding doing business in Texas with gunmakers, as well as possible conflicting information.

SEC spokespeople declined to comment. Private enforcement matters were not discussed by the sources.

This inquiry is the most clear sign that Wall Street’s ESG enforcement crackdown by the SEC is beginning to cause problems. This inquiry also shows how lenders have been caught up in Republican and Democratic battles over ESG matters.

TEXAS LAW

Texas state and municipal governments issue securities to Lenders. To be eligible to provide financing for these offerings, they must sign certifications that they are not “boycotting” energy companies, nor have any policy, practice or directive that discriminates towards a firearms entity.

According to the Municipal Advisory Council of Texas a trade association that compiles these documents and also publishes them, 36 companies have so far filed certifications.

They include Barclays (LON:), Citigroup Inc (NYSE:), RBC Capital Markets TD Securities, UBS Financial Services, and TD Securities. Wells Fargo According to certificates filed between September-November, (NYSE:).

The lenders pledge to reduce their carbon footprints by achieving net zero greenhouse gases emissions by 2050. This will impact the businesses they finance. Citigroup also placed restrictions on the sale of firearms to new clients in retail sector.

All of the above mentioned banks declined to comment. Citigroup claimed that the Texas law had not stopped it serving Texas state clients last year. The Texas policy, however, does not prohibit Citigroup from working with firearms retailers.

Reuters couldn’t determine how many lenders SEC sent these letters to or if the inquiry was limited to Texas-based certifications.

A violation of the law is not always a sign that there has been wrongdoing. An enforcement inquiry may result in no action from the agency.

American President Joe Biden has placed a high priority on tackling climate change, racial inequalities, and the SEC has increased its inspection of investor disclosures, especially regarding ESG issues, and climate risk.

To address the problem, last year the SEC created an enforcement task force. The agency stated that it is reviewing climate change disclosures by public companies to make sure they are consistent with separate reports on corporate social responsibility and provide adequate information about related risks.

Also, the agency will be preparing new disclosure regulations that will force companies to quantify and detail their climate mitigation commitments.