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Royal Bank of Canada has become caught up in efforts by Texas to limit action by banks against gun manufacturers and fossil fuel companies as attention intensifies on the divisive issues.

Texas passed laws last year that bar state contracts, including in its sizable municipal bond market, from going to banks and other financial institutions that either boycott energy companies or “discriminate” against a firearm entity or trade association.

RBC says it is in compliance with state laws, even as Texas officials are reviewing the bank’s policy. Meanwhile, the bank faces questions from environmentalists asking how the bank can comply both with the laws and its climate change commitments.

The state defines a boycott broadly. In Senate Bill 13, it includes any action by banks to limit commercial relations with an oil and gas company because it does not go beyond minimum environmental requirements. The language used in the firearms law includes refusing a business relation solely because they are a firearm entity or trade association.

RBC submitted a standing letter to the state last fall attesting that it meets those requirements, while also confirming it is aligned with a state requirement that it does not take any action against companies operating in Israel or an Israeli-controlled territory.

The Texas Comptroller, however, has recently been seeking further information from financial institutions such as RBC on their energy policies, including on any mutual funds or ETFs in their portfolios that prohibit or limit investment in fossil fuels.

“We know some of these companies hold investments in oil and gas today, but what about the future? Are they selling the hope of a ‘green’ tomorrow with promises to divest or reduce their fossil fuel exposure?” said Comptroller Glenn Hegar in a March statement announcing the increased scrutiny.

“On one hand, they push net zero,” said Hegar. “Then these same firms tell Texas and other energy states that they’re committed to the fossil fuel sector. It is time for these companies to come clean, stop the big lie and realize they can’t have it both ways.”

While the state is still working to determine which companies aren’t in compliance, the uncertainty has already led RBC, along with Barclays and Morgan Stanley, to be removed from a US$190-million bond deal in May from the Texas Department of Housing and Community Affairs, confirmed spokesman Michael Lyttle.

“The removal was because of the uncertainty over whether RBC [and the others] were in compliance with Senate Bill 13,” he said by email.

RBC has committed, along with other Canadian banks, to reach net-zero carbon emissions across its lending portfolio by 2050, and offers ETF products that exclude both fossil fuels and gun manufacturers, but the bank has also made clear it intends to keep working with the oil and gas sector and has pushed back against calls for divestment.

The bank’s willingness to adhere to the broad Texas law seems to put it at odds with its environmental commitments and the choices banks need to make about clients and their emissions targets, said Matt Price, director of corporate engagement at Investors for Paris Compliance.

“Either you’re going to miss your targets by continuing to have them as clients or you’re going to have to move away from them as clients, right? There’s a punch line at the end of there, that all the banks need to wrap their heads around, which is you’ll need to make choices ultimately if you’re serious about net zero.”

RBC spokeswoman Elisa Barsotti said in a statement that the bank uses a range of measures to judge clients and that its business practices are guided by its climate blueprint.

“RBC relies on our environmental and social expertise as well as sound business judgment when evaluating client opportunities, and we can confirm that we do not currently have any firearm manufacturing clients.”

The showdown in Texas comes as Canada’s Big Five banks have all said they’re looking to expand their U.S. operations, while pushback by some states against the net-zero targets that all five have committed to also rises.

Texas was just one of sixteen states that signed an open letter last fall saying they will be taking collective action in response to the “ongoing and growing economic boycott of traditional energy.”

The Texas laws have already shaken up the state’s bond market, with major players like Bank of America and JPMorgan Chase absent from most bond deals in the state since the gun law came into effect last September, according to Bloomberg reports. After the Parkland school shooting in Florida in 2018, both banks said they were making changes to their lending practices towards the firearms industry.

Last week’s school shooting in Uvalde, Texas has drawn renewed focus on both the Texas law and bank policies toward the firearms industry, but so far U.S. banks have not been as vocal on proposed changes.

For Price at Investor for Paris Compliance, the Texas laws raise questions about how far banks are willing to go for access to certain markets.

“There’s a bigger picture question here, which is, you know, are banks like RBC signalling, never walk away from any business, even if it means more gun deaths and more climate chaos?”