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Anti-ESG legislation seen facing uphill struggle to become law

Henry Engler  Thomson Reuters Regulatory Intelligence

· 5 minute read

Henry Engler  Thomson Reuters Regulatory Intelligence

· 5 minute read

After a flurry of anti-ESG legislation was proposed, many of those bills are facing opposition on their difficult path to becoming law

A raft of laws introduced by several US states hostile to companies that employ environmental, social & governance (ESG) policies in their investment practices face political and legal challenges, leading many bills to become watered down or even fail in the courts.

Various factors go into whether an anti-ESG bill ultimately gets enacted into law, and over the past year the pace of such legislation has picked up, according to the law firm Ropes & Gray which tracks the progress of such bills.

Much of the focus has been on in what jurisdictions have anti-ESG bills been on the rise; but there have also been bills introduced that seek to insert ESG factors in the decision-making process by the state’s pension funds, for example.

Political dynamics in the state — such as which party controls the legislature and the governor’s office — are often a key determinant of a law’s success. Additionally, there is the question of whether there is already a similar law on the books and what impact the legislation would have on the state’s future economic and financial prospects.

61 anti-ESG bills remain pending

Looking across the current landscape, there are at least 61 anti-ESG bills that have been identified as either introduced by a state legislature but remain pending in committee or are supposed to carry over from the last legislative session to the 2024 session, according to the firm. The most active states have been Oklahoma with 14 bills, followed by South Carolina (9), Missouri (8), and West Virginia (7).

In a brief example of recent legislation and the political dynamics involved, in New York — where Democrats control both houses of the legislature and the governor’s office — Assembly Bill 4090 was proposed last year. The bill would prohibit the Comptroller from using ESG criteria as a screening method for selecting companies and funds in which to invest the state pension fund. According to experts, the bill has little chance of passage.

Political dynamics in the state — such as which party controls the legislature and the governor’s office — are often a key determinant of a law’s success.

Then there are states like Arizona and Wisconsin where political power is divided between the legislature and governor’s office, so the likelihood of one of these polarizing anti-ESG bills getting adopted is also low. However, even in states like New Hampshire, where Republicans control both the governor’s office and state legislature, if a bill goes too far or is too aggressive, that will likely fail as well, said Jonathan Reinstein, an attorney with Ropes and Gray.

That situation played out recently with a controversial bill that was introduced last month (House Bill 1267) in the New Hampshire legislature that would make it a felony, punishable by up to 20 years in prison, if a fiduciary, which would include asset managers, invests state or taxpayer funds knowingly in a manner violating fiduciary duties by considering ESG criteria. HB 1267 was unanimously rejected by the House Executive Departments and Administration Committee on Feb. 8. The committee vote came on the heels of a public hearing in which opponents outnumbered supporters 34 to 3.

States lists of individual firms prompts some action

Apart from legislation, certain states have also compiled restricted lists, which target financial institutions that allegedly boycott industries like fossil fuel and firearms. Several states such as Kentucky, Oklahoma, Texas, and West Virginia have enacted these anti-boycott laws in the last two years, which authorize the state comptroller or treasurer to maintain a list of restricted financial institutions that will be barred from contracting with or doing business with the state.

“While it is not always clear how a financial institution ends up on one of these restricted lists, in total, 30 institutions appear on one or more of the four state lists that have been made publicly available,” according to Ropes & Gray.

“The fear of being added to these lists can have dramatic and real consequences in terms of financial institutions changing their investment practices and/or withdrawing from global climate coalitions to avoid the outcome of getting placed on a restricted list.”

Actions for consideration for asset managers

Since asset managers have borne the brunt of the anti-ESG crusade, there are some considerations that firms might wish to take when operating in such states, the law firm advised. These include:

    • Be measured and careful in communications — It is critically important for managers to be very measured and careful when speaking with state officials. All communications, whether written or oral, must be accurate, precise, and consistent with statements being made to other investors.
    • Be thoughtful when responding to state inquiries — Even if they seem innocuous, communications between managers and state officials could be used as the basis for a determination or allegation that a manager is not acting consistently with their fiduciary duties.
    • Know what your contracts require — In light of the divergence in state and federal retirement laws recently due to the ESG issue, managers need to make sure that they understand what contractual promises mean and that they can comply, and are complying, with the various state laws.

In a recent analysis, Ropes & Gray stated that based on the “significant uptick in activity [in 2023] at both the state and federal levels, the fight over ESG in public investments is far from over and may even be just beginning.” Indeed, the pro and opposition forces will stay active in 2024, especially because it is an election year in the US.

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