By: Catrina Crittenden

While environmental, social, governance (“ESG”) investing is seemingly on the rise, so is anti-ESG legislation in Republican leaning states.[1] Popularized by asset management giant BlackRock, investors worldwide are choosing to invest selectively in environmentally, socially, and corporately responsible companies.[2] Investors use ESG, a non-financial consideration, as a set of standards to screen investments based on factors such as greenhouse gas emissions, toxic waste management, diversity, employee health and safety, and corruption.[3] Many argue that in considering ESG factors, investors are decreasing their financial risk by ensuring companies and projects avoid the financial pitfalls of climate change and expensive lawsuits.[4] Experts predict that the world will invest $41 trillion in ESG assets by the end of 2022.[5]

While companies increased their ESG expenditure, international and national governing bodies began legislating and regulating ESG uniformity for standardization.[6] Yet in 2021, legislators across the United States attempted to regulate ESG investing in a very different way.[7] As of August 2022, sixteen Republican-leaning states restricted their state funds from going to companies that consider ESG factors in their investments.[8] The majority of these bills prevent state investment funds from going to companies that boycott the firearm or fossil fuel industries.[9] Yet, states such as Florida and Texas impose restrictions that are a broader referendum on ESG considerations.[10]

For example the Florida resolution,[11] adopted in August 2022, requires the state pension fund to invest in companies that only consider “pecuniary factors” that “do not include the consideration of the furtherance of social, political, or ideological interests.”[12] The ban effectively prevents state investment of any asset management fund that considers ESG factors in their risk analysis.[13] Prior to Florida’s outright ban, many considered Texas’s anti-ESG laws the most strict and broadest in the country.[14] Texas passed Senate Bills 13[15] and 19[16], which prohibit the state from contracting with ESG considerations that boycott the fossil fuel or firearm industry.[17] Both bills include a list of blacklisted companies removing “348 funds from state pensions.”[18] After the legislation passed, the Texas Comptroller published a list of “Financial Companies that Boycott Energy Companies.”[19] The list is incredibly broad, including companies like BlackRock, Fidelity, Vanguard, and State Street.[20] According to experts, Texas’s ESG prohibition is expensive, costing taxpayers “millions of dollars” since 2021.[21]

On the other hand, West Virginia is taking a considerably less strict approach to anti-ESG legislation.[22] Unlike Texas’s and Florida’s anti-ESG bills, West Virginia’s March 2022 bill[23] is proscriptive. [24] Rather than prohibiting the state pension fund from investing in ESG friendly companies, the bill “allows the state entity to refuse to contract while not requiring that it refuse to contract.”[25]

Ultimately, while the existing anti-ESG laws are concerning for ESG investors, states are attempting to get stricter ESG bans passed through their relevant state bodies.[26] Currently, states’ anti-ESG laws have large loopholes that companies can use to circumvent divestment.[27] Thus, states are continuing to propose legislation that would make anti-ESG rules increasingly strict.[28] Proposed legislation in Kansas, Kentucky, Louisiana, Minnesota, New Hampshire, and Wyoming “sought to prohibit financial institutions or insurers from discriminating against a person based on an ESG score or ESG criteria.”[29] These laws, if passed, would constitute a de facto ban on ESG in each state.[30]

The proposed laws mirror attempted litigation over whether ESG investors and companies are “discriminating” against certain companies or individuals in their ESG efforts.[31]  For example, the Superior Court of California struck down state legislation that established board diversity quotas after plaintiffs argued the bill discriminated against prospective members who were not a member of a diverse class.[32] Similarly, the Alliance for Fair Board Recruitment (“AFFBR”), a Texas company, filed a petition in front of the Court of Appeals for the Fifth Circuit arguing that the Nasdaq board diversity quota is “unfair” and force individuals to “complete on an uneven playing field.”[33]

In August 2022, a group of “[n]ineteen state attorneys general wrote a letter […] to BlackRock CEO Laurence D. Fink [warning] that BlackRock’s environmental, social and governance investment policies appear to involve rampant violations of the company’s fiduciary duties.[34] The letter serves as both a warning to ESG investors of the states’ anti-ESG position and as advice to shareholders to pursue claims on the basis of failing to maximize financial returns.[35]

Companies should continue to pay attention to increasing anti-ESG litigation and legislation as states attempt to protect their financial interests. It is unclear whether challenges to ESG will have an impact on companies’ bottom line, but it is clear that both the ESG and anti-ESG legal playing field is growing increasingly contentious.

[1] See Ingo Steinhaeuser, How Regulations are Moving ESG into the Risk and Compliance Field, Thompson Reuters (Aug. 5, 2022), https://www.thomsonreuters.com/en-us/posts/investigation-fraud-and-risk/esg-regulations-compliance/; Lance Dial, et al., The Challenge of Investing in the Face of State Anti-ESG Legislation, Reuters (Aug. 24, 2022 10:02 AM),  https://www.reuters.com/legal/legalindustry/challenge-investing-face-state-anti-esg-legislation-2022-08-24/.

[2] Cam Simpson, How BlackRock Made ESG the Hottest Ticket on Wall Street, Bloomberg (Dec. 21, 2022, 10:00AM), https://www.bloomberg.com/news/articles/2021-12-31/how-blackrock-s-invisible-hand-helped-make-esg-a-hot-ticket.

[3] ESG Investing and Analysis, https://www.cfainstitute.org/en/research/esg-investing (last visited Oct. 13, 2022).

[4] See Emily Bannister, Adopting ESG Factors to Improve Returns, Reduce Risk, Investmentnews.com (Sept. 24, 2013), https://www.investmentnews.com/adopting-esg-factors-to-improve-returns-reduce-risk-54000.

[5] ESG May Surpass $41 Trillion Assets in 2022, But Not Without Challenges, Finds Bloomberg Intelligence, Bloomberg (Jan. 24, 2022), https://www.bloomberg.com/company/press/esg-may-surpass-41-trillion-assets-in-2022-but-not-without-challenges-finds-bloomberg-intelligence/.

[6] See Sandra Flow, et al., Navigating the ESG Landscape, Harvard L. Sch. F. on Corp. Governance (Jan. 31, 2020), https://corpgov.law.harvard.edu/2020/01/31/navigating-the-esg-landscape/.

[7] See Tsvetana Paraskova, Republicans Withdraw $1 Billion From BlackRock Due to Its ESG Policies, Oilprice.com (Oct. 10, 2022 8:30 AM), https://oilprice.com/Latest-Energy-News/World-News/Republicans-Withdraw-1-Billion-From-BlackRock-Due-To-Its-ESG-Policies.html.

[8] Dial, supra note 1.

[9] Dial, supra note 1.

[10] See Paraskova, supra note 7; Governor Ron DeSantis Eliminates ESG Considerations from State Pension Investments, Florida Government (Aug. 23, 2022), https://www.flgov.com/2022/08/23/governor-ron-desantis-eliminates-esg-considerations-from-state-pension-investments/.

[11] Governor Ron DeSantis Eliminates ESG Considerations from State Pension Investments, supra note 10.

[12] Governor Ron DeSantis Eliminates ESG Considerations from State Pension Investments, supra note 10.

[13] See Governor Ron DeSantis Eliminates ESG Considerations from State Pension Investments, supra note 10 (limiting ESG considerations to situations in which investors would not “sacrifice investment return or take on additional investment risk to promote any non-pecuniary factors”).

[14] See Dial, supra note 1.

[15] S.B. 13, 87th Leg. Reg. Sess. (TX 2021).

[16] S.B. 19, 87th Leg. Reg. Sess. (TX 2021).

[17] See S.B. 13, 87th Leg. Reg. Sess. (TX 2021); S.B. 19, 87th Leg. Reg. Sess. (TX 2021).

[18] See S.B. 13, 87th Leg. Reg. Sess. (TX 2021) (establishing that the state cannot invest its funds in companies that boycott the energy sector); S.B. 19, 87th Leg. Reg. Sess. (TX 2021) (establishing that the state cannot invest its funds in companies that boycott the firearm sector); see Tex. Gov’t Code Ann. § 809.001 (West 2021) (articulating a list of companies the state of Texas cannot invest in and the pension must divest from).

[19] See Divestment Statute List, https://comptroller.texas.gov/purchasing/publications/divestment.php (last visited Oct. 12, 2022).

[20] Id.

[21] Adam Aton, Inside Texas’ Attempts to Turn ESG Upside Down, EENews (Aug. 6, 2022, 6:35 AM), https://www.eenews.net/articles/inside-texas-attempt-to-turn-esg-upside-down/.

[22] See S.B. 262, 85th Leg. Reg. Sess. (WV 2022).

[23] S.B. 262, 85th Leg. Reg. Sess. (WV 2022).

[24] Dial, supra note 8.

[25] Dial, supra note 8.

[26] See ESG and State Law in 2022: Conflicts and Trends, WestLaw (Sep 9, 2022), https://us.practicallaw.thomsonreuters.com/w-036-3334?transitionType=Default&contextData=(sc.Default)&VR=3.0&RS=cblt1.0.

[27] See e.g., Gina Gambetta, The Kind of Loophole That’s Big Enough To Drive A Truck Through: A Legal View of Anti-ESG Legislation in the US, Responsible Investor (July 11, 2022), https://www.responsible-investor.com/the-kind-of-loophole-thats-big-enough-to-drive-a-truck-through-a-legal-view-of-anti-esg-legislation-in-the-us/; Mario Alejandro Ariza and Mose Buchele, Texas Stumbles In Its Efforts to Punish Green Financial Firms, NPR (Apr. 29, 2022, 5:01 AM), https://www.npr.org/2022/04/29/1095137650/texas-stumbles-in-its-effort-to-punish-green-financial-firms.

[28] See ESG and State Law in 2022: Conflicts and Trends, supra note 26.

[29] See ESG and State Law in 2022: Conflicts and Trends, supra note 26.

[30] See ESG and State Law in 2022: Conflicts and Trends, supra note 26.

[31] See Brad Rosen et al., ESG Under Attack, Wolters Kluwer (July 14, 2022), https://business.cch.com/srd/SP_ESG_UnderAttack_07142022_FINAL.pdf.

[32] Crest v. Padilla, No. 20STCV37513 (Sup. Ct. Cal. 2022), https://business.cch.com/srd/Crest-v-Padilla-LA-Superior-20STCV37513-Order-re-summary-judgment4-1-22.pdf.

[33] Alliance for Fair Board Recruitment, Nasdaq Board Diversity Quotas Challenged in Federal Court by the Alliance for Fair Board Recruitment, Cision (Aug. 18, 2021, 8:30 AM), https://www.prnewswire.com/news-releases/nasdaq-board-diversity-quotas-challenged-in-federal-court-by-the-alliance-for-fair-board-recruitment-301357920.html.

[34] Jed Rubenfeld and William P. Barr, ESG Can’t Square With Fiduciary Duty, Wall Street Journal (Sep. 6, 2022, 6:31 AM), https://www.wsj.com/articles/esg-cant-square-with-fiduciary-duty-blackrock-vanguard-state-stree-the-big-three-violations-china-conflict-of-interest-investors-11662496552 (explaining that Louisiana and Indiana went as far as to warn that “investment staff and investment advisers may be liable if they continue allocating funds to ESG-promoting asset managers such as BlackRock.”).

[35] See id.