Troubling Legal Trend as States Block Responsible Investing and Climate Solutions
In what the Republicans have called “Woke” policies, states have taken broad efforts to block ESG. Many have been unsuccessful, but a coordinated effort is showing more and more anti-ESG policies and resolutions seeing approval.
Simpson Thatcher and Bartlett, LLP put out a report titled Seven Key Trends in ESG From 2023—and What to Expect in 2024. Anti-ESG lawmaking efforts, which first emerged as a trend in 2021, reached new heights this year with over 150 anti-ESG bills and resolutions introduced in 37 states.
Most of these bills were rejected or failed to advance, but as of December 2023, at least 40 anti-ESG laws have been enacted in 18 states. In 2023 more than 40 anti-ESG laws were enacted in 18 states. The proposed bills are in four main categories – anti-ESG investing laws; anti-boycott laws; contracting restrictions and anti-discrimination laws. Further, mentions of ESG on earnings calls last year dropped to their lowest level since 2020.
More than 150 anti-environmental, social and governance (ESG) bills and resolutions were introduced in 37 US states in 2023. - Simpson Thacher, and Bartlett LLP
As of December 2023, at least 20 states have enacted laws or adopted regulatory action in the form of resolutions, policy statements or directives that seek to prohibit or discourage public entities from considering ESG factors when investing state resources.
The prohibitions generally apply to state pension and/or state and local government entities’ fiduciaries, proxy advisors and service providers. They essentially prohibit in-scope entities from considering certain ESG factors in evaluating or managing an investment or, in some cases, in proxy voting and portfolio company engagement.
Some attach significant penalties for noncompliance and/or address what information state enforcement entities may rely on regarding an investment manager’s prohibited use of ESG factors.
Public Support for ESG
A 2023 survey by Public Citizen showed that a majority of voters (56%) “oppose legislation to limit the type of information about a corporation’s business record that is disclosed to fund managers, investors and the public, including 38% who strongly oppose.
The opposition crosses partisan lines—Democrats 58% oppose, 38% strongly oppose; Independents 63% oppose, 46% strongly oppose; Republicans 52% oppose, 34% strongly oppose.” A wide majority of voters “think that financial risks related to a company’s environmental record (65%, 34% strong yes) and financial risks to their investment portfolios related to climate change (63%, 33% strong yes) should also be taken into account when making decisions about potential investments, with a third in strong agreement.”
Texas’ enactment of two anti-ESG laws has led five large banks that underwrote 40% of Texas’ municipal debt to exit the state, which has decreased competition and increased costs for stakeholders, specifically adding $300 to 500 million to borrowing costs on debt issued in the first eight months after the laws were enacted.
2023 Anti-ESG Policies
A number of laws focused on a coordinated effort to only allow public investments to be based on pecuniary factors or economic factors (e.g., the prudent investor rule) rather than reputational factors like those in ESG (e.g., Arkansas HB 1253, Florida HB 3, Indiana HB 1008, Kentucky HB 236, Montana HB 228, North Carolina HB 750, Tennessee SB 955, and Utah SB 96)
Some states took it farther by prohibiting pension boards from contracting with a service provider that has made an ESG commitment (Indiana HB 1008).
North Dakota HB 1429 prohibits insurers from refusing to insure or charging a different rate based on ESG criteria, DEI policies, or political and ideological factors
Alabama, Attorney General Written Testimony argued that ESG policies threaten America’s democratic system, and that ESG must be stopped
Missouri urges the state and its executive officers, state agencies and officials to oppose (i) a forced imposition of ESG policies, (ii) costs on state citizens related to the imposition of ESG policies, (iii) any action based on the assumption that net zero is likely to occur, (iv) any SEC regulations or other climate-related rules, (v) any private governmental agency discussion on climate-change risk and ESG policies and (vi) any policies of federal banking regulators that require ESG to be used in the decision-making process - Missouri HR 12
What’s Happening in 2024?
Pleiades tracks the status of anti-ESG legislation in the U.S. In 2024, nearly 100 anti-ESG Bills were proposed and died.
Further, in September 2024, a federal district court struck down Missouri's anti-ESG rules that would prohibit investment advisors from utilizing ESG factors when making investment decisions (absent written consent of the client). The District Court stated the rules were preempted by Federal law, violate the First Amendment, and are unconstitutionally vague.
Similar lawsuits are being filed against anti-ESG laws. The American Sustainable Business Council, alleges that the Texas’s SB 13 law is unconstitutional because it violates free speech, is vague, and impedes due process. SB13 created a blacklist of asset managers accused of boycotting the fossil fuel industry including BNP Paribas, HSBC, Impax Asset Management, Schroders, and UBS.
That leaves four anti-ESG laws that passed as of October.
Florida House Bill 989 states that “It is an unsafe and unsound practice for a financial institution to deny, or cancel, suspend, or terminate its services to a person, or to otherwise discriminate against a person in making available such services, or in the terms or conditions of such services, on the basis of…the use of any rating, scoring, analysis, tabulation, or action that considers a social credit score based on factors including, but not limited to…the person's failure to meet or commit to meet, or Environmental standards, including emissions standards, benchmarks, requirements, or disclosures; Social governance standards, benchmarks, or requirements, including, but not limited to, environmental or social justice; or Policies or procedures requiring or encouraging employee participation in social justice programming, including, but not limited to, diversity, equity, or inclusion training. Tennessee HB 2100 uses similar language, indicating a concerted effort to hamper ESG efforts.
Idaho Senate Bill 1291 states that a public entity may not enter into a contract with a company unless the contract contains a written certification from the company that it is not currently engaged in, and will not for the duration of the contract engage in, a boycott of any individual or company because they engage in or support the exploration, production, utilization, transportation, sale, or manufacture of fossil fuel-based energy, timber, minerals, hydroelectric power, nuclear energy, or agriculture.
On October 18, 2024, The US House of Representatives recently passed a major ESG reform package that is on its way to the Senate.
Prioritizing Economic Growth Over Woke Policies Act. This measure (HR 4790) provides a direct legislative check on mandatory ESG reporting regulations. The bill prevents the Securities and Exchange Commission from forcing publicly traded companies to disclose non-material information about board diversity and climate change risks.
Protecting Americans’ Investments from Woke Policies Act. This bill (HR 5339) counteracts the Labor Department’s (DOL) ESG-based pensions policy, which exposes retirees to additional investment criteria. It states the practice of “ESG screening” by managers excludes politically disfavored but otherwise profitable industries, such as fossil fuels and weapon manufacturing, from the retiree’s portfolio. The measure would do away with that and only allow for consideration of non-financial factors in limited situations.
The No Discrimination in My Benefits Act. Similar to the above protections against ESG criteria in retirement planning, this bill (HR 5338) ensures that fiduciaries aren’t selected to manage funds based on diversity, equity, and inclusion (DEI) criteria.
