Back in 2015 when California had the seventh-largest economy in the world, outperforming the rest of the US, economist Irena Asmundson attributed her native state's trajectory to a government increasingly in harmony with the diversity of its constituents. The cost of clean energy will “continue to fall” because of the convergence of “public policy and people's preferences,” she said amid the proliferation of solar roofs and zero emission electric vehicles from Balboa Park to Yosemite Valley. “Everyone can see the writing on the wall, that climate change is happening. These clean technologies are going to be more valued in the future.”
That's especially true for business in the Golden State, whose gross domestic product is poised to overtake Germany’s and where the 30 publicly-traded companies deriving more than half of their revenue from alternative energy are mostly California-based. Those companies delivered a total return of 1,600% the past 10 years, exponentially greater than the 46% income plus appreciation of the world's 58 traditional fossil-fuel firms as the cost of solar declined 80%, according to data compiled by Bloomberg. Solar is now the cheapest source of bulk electricity generation in most sunny countries, on a per-MWh basis, according to Jenny Chase, solar analyst at BloombergNEF.
California's innovation and prosperity are the consequence of stakeholder-centric environmental, social and governance (ESG) policies furthering sustainability, consistent with Adam Smith's invisible hand in the free market economy. Larry Fink, chairman, chief executive officer and co-founder of BlackRock Inc., whose $10 trillion in assets makes it the largest money manager, said as much when he told shareholders that ESG is “capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers and communities your company relies on to prosper.”
Not so in Texas and Florida, where recent and proposed laws related to the environment, education, guns and social behavior defy the majority of their citizens who favor civil and reproductive rights and want to be safe from mass shootings. The rate of gun deaths per 100,000 people in Texas, which like Florida gives most adults the easiest access to firearms, including military-style automatic weapons, is about 67% greater than California's, according to US Census data. The rate in Florida is similarly worse than in California, which has more gun laws than any other state because ESG is overwhelmingly supported by its population of 39 million.
In Florida and Texas, as well as half a dozen other states where gun death rates, bans on abortion and opposition to clean energy are ubiquitous, ESG and Fink are the purported boogeymen, disingenuously assailed as woke by Governors Ron DeSantis – who is forecast to enter the 2024 presidential race as soon as today - and Greg Abbott, and whose gerrymandered legislatures reduce Black voter representation and prohibit companies like BlackRock from managing state pension funds or underwriting their debt obligations.
Jimmy Patronis, who as Chief Financial Officer is responsible for Florida's $36 billion pension fund, said he will bar Bank of America Corp. and Wells Fargo & Co., the Nos. 2 and 3 US banks, because they have emissions targets and avoid business with firearms makers. The state now criminalizes school librarians for keeping banned books in circulation and is suing Walt Disney Co., whose Walt Disney World theme park complex in Orlando is the largest single-site employer in the US, because DeSantis took umbrage when the company publicly challenged state laws undermining diversity, equity and inclusion. Disney will no longer move forward with a plan to relocate California employees to a new $864 million corporate campus in Florida, depriving DeSantis and the state of some 2,000 high-paying jobs and all the economic and tax benefits that go along with them.
The Republican-controlled legislature in Texas stunned many of the state's biggest boosters when bills encouraging fossil fuel and stymying renewable energy development were introduced, even though Texas is No. 1 in the nation in wind power and has the resources to overtake California in solar installations. “This is a `radical departure,' as Locke Lord, a national law firm active in the energy business, put it, for a state that `has long prided itself on a regulatory climate that is business-friendly and encourages, rather than stifles, economic development,” wrote Michael Webber, professor of energy resources at the University of Texas, in an opinion piece for the New York Times earlier this month. Webber is also the chief technology officer at the venture fund Energy Impact Partners, a global investment firm focused on technologies that help decarbonize the global economy.
The attack on ESG is a losing proposition for Florida and Texas, as evidenced by the increase in borrowing costs to taxpayers since major banks and other companies were excluded from doing business with the states and their local governments last year. Texas, rated AAA, pays about 20 basis points more in interest on its general obligation bonds than California, which has an inferior AA- rating from S&P Global. The two largest states' financing costs were equivalent in 2022. Florida, also rated AAA, is paying a record 44 basis points more than California, an unprecedented setback for a top-rated borrower in the $4 trillion municipal bond market, according to data compiled by Bloomberg.
Unlike California, Texas and Florida have no income taxes, so their bonds historically have relatively fewer buyers than issuers with bonds exempt from federal, state and local taxes. Even so, the sudden decline in relative value of Florida and Texas obligations reflects the backlash in the market amid the states' policies against companies that consider ESG in their investment criteria. The bonds of California, in contrast, appreciated 4.7% during the past 12 months, outperforming Texas by 1.2 percentage points and Florida by 0.9 percentage point, according to data compiled by Bloomberg.
California, where 12% of the US population lives and contributes 14.8% to US GDP, continues to lead the country in the stock market. The companies that are domiciled there and also members of the Russell 3,000 Index appreciated 35% this year as corporate America overall returned 8%, data compiled by Bloomberg show. Companies in Texas and Florida lagged behind at 7% and 6%. Corporate California will continue to outperform, with average revenue growth of 20% in 2023, or almost twice the 11% average for the US and more than double Florida's 9% and Texas 7%, according to analyst estimates compiled by Bloomberg. California also remains the leading corporate employer, adding 26% to its payrolls the past three years when similar employment in Texas and Florida increased 8% and 5%.
As for clean energy, more than 600 gigawatts of new solar, wind and storage will come online in the US between 2023 and 2030, and California will have the greatest share of clean power capacity, according to BloombergNEF. At the same time, the California Independent System Operator real-time prices are trending below negative at a record rate because of the region's growing renewable generation.
All of which proves the convergence of public policy and the preferences of citizens creates the surest path to growth.
____
(With assistance from Shin Pei.)
____
ABOUT THE WRITER
Matthew A. Winkler, editor in chief emeritus of Bloomberg News, writes about markets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
