By Chris Prentice

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission (SEC)’s Texas office has launched a preliminary probe into lenders’ disclosures about their policies on hot-button issues like climate change and gunmakers, according to two people familiar with the matter.

The inquiry appears to relate to two Texas laws, enacted last year, banning state entities from working with companies that discriminate against firearms or fossil fuel companies, the sources said.

Amid pressure from investors and employees, banks have become active on environmental, social, and governance (ESG) issues, eschewing gunmakers, backing racial equity projects and pledging to phase out fossil fuel lending, sparking a backlash from Republican lawmakers who worry sectors of the economy may lose access to credit.

The SEC’s new Democratic leadership, meanwhile, has pledged to crack down on public companies that may be inflating their ESG credentials to attract investors and burnish their reputation, or which may be underplaying related risks.

In recent weeks, enforcement staff in the SEC’s Fort Worth, Texas, office sent letters to a number of banks that have acted as underwriters in the Republican-led state, asking them to substantiate ESG policies they have outlined in public disclosures, the same people said.

The SEC seems to be scrutinizing potential conflicts between what the underwriters have told investors versus Texas regulators about their policies on doing business with gunmakers and fossil fuel companies, the sources said.

A spokesperson for the SEC declined to comment. The sources declined to be identified discussing private enforcement issues.

The inquiry, which has not previously been reported, is the clearest sign yet that the SEC’s enforcement crackdown on companies’ ESG claims is starting to create headaches for Wall Street. It also highlights how lenders are increasingly getting caught in the middle of Republican and Democratic fights over ESG issues.

TEXAS LAW

Lenders who want to underwrite offerings of securities issued by Texas state and local governments have had to sign public certifications saying they do not “boycott” energy companies or have a practice, policy, or directive that discriminates against a firearm entity or firearm trade association.

Thirty-six companies have filed such certifications, according to the Municipal Advisory Council of Texas, a trade association which compiles and publishes the documents.

Among them are Barclays, Citigroup Inc, RBC Capital Markets, TD Securities, UBS Financial Services and Wells Fargo, according to certifications filed between September and November.

These lenders have pledged to cut their carbon footprints and achieve net zero greenhouse gas emissions by 2050, which will affect the companies they finance. In 2018, Citigroup also set restrictions on firearms sales for new retail-sector clients.

The above banks all declined to comment. Last year, Citigroup said the Texas law did not stop it from serving Texas state clients since its policy does not restrict them from working with retailers that sell firearms.

Reuters could not ascertain how many lenders the SEC had sent the letters to and if its inquiry was confined to firms that have filed such Texas certifications.

An enforcement inquiry is not necessarily an indication of wrongdoing and may not result in any action by the agency.

Under U.S. President Joe Biden, who has prioritized tackling climate change and racial inequality, the SEC has stepped up its scrutiny of investor disclosures, particularly on ESG issues and climate change risks.

Last year, the SEC formed an enforcement task force to examine the issue. In September, the agency said it was reviewing public companies’ climate-change disclosures to ensure they were consistent with their separate corporate social responsibility reports and provided adequate details on related risks and other issues.

The agency is also preparing new disclosure rules that will require companies to detail and measure commitments to mitigating climate change.

(Reporting by Chris Prentice; Editing by Michelle Price and Nick Zieminski)