The challenge of investing in the face of anti-state ESG laws

August 24, 2022 – Interest in environmental, social and governance (ESG) investing has increased in recent years and, at the same time, attracted the attention of global regulators. Given the ambiguity in the terminology surrounding ESG, some global regulators are concerned that investment managers may be “greenwashing” their investment products, or overemphasizing the ESG features of these products.

In Europe, ESG investment products are subject to disclosure requirements stemming from the Sustainable Finance Disclosure Regulation, and the US Securities and Exchange Commission (SEC) has proposed its own rules regarding the disclosures required for US mutual funds and the terms such funds may adopt. Names that suggest an ESG focus.

In recent months, this regulatory interest has broadened to include individual states that have opened their own fronts in terms of regulating ESG investments. Some of these states are using their legislative power to limit ESG investments, citing concerns that ESG investments put policy and social objectives ahead of financial objectives, or even concerns related to the impact ESG investments may have on their local economies. Many states have proposed or adopted new laws that prohibit or significantly limit their state governments from investing in ESG strategies or doing business with financial institutions that adopt specific ESG policies (anti-ESG bills).

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Table of Anti-ESG Bills is given below:

Source: Chart compiled by author

Types of anti-ESG bills

These anti-ESG bills vary greatly from state to state. Almost all state anti-ESG bills require state agencies to take certain anti-ESG actions, whether it’s divesting from companies that engage in ESG investing or refusing to do business with companies that engage in ESG discrimination (the definition of which varies somewhat from state-to-state). Anti-ESG bills vary in their scope, the state entities they regulate, the details of what they require, and the types of entities they target. Despite the large differences, as a general matter there are two main categories of anti-ESG bills.

One class of laws targets “financial institutions” that “boycott” or “discriminate” against companies in certain industries. Such bills prohibit the state from doing business with such entities and/or investing state assets (including pension plan assets) through such entities (prohibition bills).

Divestment bills often involve “discrimination” against fossil fuel-related energy companies, but some states have also targeted companies that “boycott” mining, manufacturing agriculture, or manufacturing timber. These boycott bills are based on the premise that companies refusing to do business with companies domiciled in a state are indirectly harming the citizens of that state and therefore should not (i) benefit from direct state investment in such companies or (ii). Contract for business from the state.

Generally, boycott bills require certain elements of the state to be determined as entities engaging in “boycott” or “discrimination” against the issuers concerned. With respect to these entities, states may require divestment from companies that engage in ESG-related discrimination (e.g., an anti-ESG bill in Oklahoma (HB 2034) would require state government entities to divest from all publicly traded securities of financial companies. Energy company exclusion) .

Additionally, entities contracting with the state may be required to include certifications/representations in their contracts (generally subject to a minimum contract value of $100,000) that they do not and will not discriminate against specific entities protected by exclusion bills. Some states have anti-ESG bills that mandate only one of the above actions, and other states have bills that mandate both.

A second category of anti-ESG bills would prohibit the use of state funds for “social investment” purposes. Under this type of anti-ESG bill, the state would be specifically prohibited from investing in strategies that consider “social” factors for any purpose other than maximizing investment returns.

A range of anti-ESG bills

The scope of anti-ESG bills can also vary depending on the type of bill. For example, a recently adopted law in Texas regarding the requirement to divest holdings of financial institutions excluding energy companies applies to five specific public retirement funds and permanent school funds, but the contract requirements apply to any Texas state agency or political subdivision. of Texas.

Importantly, all these anti-ESG bills are limited in their application to the activities of state institutions; They do not affect the ability of private investors, on their own account, to choose ESG-related investment strategies or to invest in a particular entity, including those deemed to be subject to applicable state limits.

Additionally, anti-ESG bills vary as to their impact. While nearly all state anti-ESG bills require state entities to take certain anti-ESG actions, one state bill (West Virginia’s SB 262), is permissive rather than proscriptive: it allows a state entity to refuse to contract when it is not required. Refuse to compromise.

Implications for investment managers

Both types of anti-ESG bills pose distinct problems for ESG investment managers. For example, an ESG investment manager seeking to provide an investment product that appeals to investors who want a more environmentally or socially conscious investment product may propose an investment strategy that avoids investments in fossil fuel producers, firearms companies, or companies that do not implement sustainable forestry. Exercises.

These anti-ESG bills could prohibit states from investing in such products and potentially (depending on how they are interpreted) engaging an ESG investment manager to manage any of the state’s assets, even non-ESG ones. Related investment products.

Additionally, investment managers who do not necessarily view themselves as ESG managers may be impacted by these anti-ESG bills. Many investment managers are acknowledging that ESG criteria, including an issuer’s environmental impact, can be relevant factors in investment decision-making.

Indeed, this recognition underpinned a recent SEC proposal that would require public issuers in the United States to provide more information about the impact of climate-related risks on their operations. The challenge created by these anti-ESG bills centers on the question of whether implementing an investment strategy that considers ESG risks effectively “boycotts” industries or particular issuers, or makes the strategy ineligible for state investment as a “social” strategy. .

Investment managers navigating these complicated waters must understand that these anti-ESG bills are new and, as such, raise new interpretive questions. For example, an assessment of whether an investment manager “boycotts” the energy industry should focus on the company’s activities and policies and not on its investment products. If an investment manager offers an ESG-style fund, make it clear that as a company it does not discriminate against the entire fossil-fuel industry (for example, does not completely ban, reject, or reject all investments in the fossil-fuel industry. underwrite contracts), the investment manager itself should not be considered to be “boycotting” energy companies, even though its products may be.

Additionally, and as noted above, there is considerable variation from state to state. Some states restrict only one “type” of ESG-related activity. For example, on the one hand, states such as Utah (HB 312), Minnesota (HF 4574), South Carolina (HB 4996), and Idaho (HB 737) have proposed anti-ESG bills limiting state contracts with companies that opt ​​out. Finance energy companies, but no laws related to the gun industry.

On the other hand, states such as Wyoming (HB 0236), Arizona (HB 2473), Missouri (SB 1048), South Dakota (SB 182), and Ohio (HB 297) have proposed anti-ESG bills targeting companies that discriminate. There is no law against the gun industry, but the energy industry.


The regulatory environment for ESG investing was already complex, with the involvement of multiple global regulators and an ever-growing menu of ESG standard-setters. With the advent of anti-ESG bills from several US states, the regulatory implications of ESG investing are now more complex, especially where some ESG activities may be unable to do business with individual state governments. Unfortunately, it looks like this is a trend that could accelerate — and increase complexity in the field — before it’s too late.

Elizabeth Goldberg is a regular contributor to ESG and a columnist on governance issues for Reuters Legal News and Westlaw Today.

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Lance Dial

Lance Dial is a partner with Morgan, Lewis & Bockius in the Boston office. With over a decade of experience as senior in-house counsel with global investment managers, he has a deep understanding of mutual fund law and operations and is fluent in regulations applicable to investment managers. He is well versed in the formulation of investment products and environmental, social and governance (ESG) and sustainability matters.

Elizabeth Goldberg

Elizabeth Goldberg, a partner at Morgan, Lewis & Bockius LLP, advises employee benefit plan sponsors and service providers of those plans (including financial services firms) on ERISA US Department of Labor (DOL) enforcement investigations, DOL ERISA regulatory matters, and ERISA fiduciary. Consultation and Compliance. She is based in the firm’s Pittsburgh office and can be reached at [email protected]

Rachel Mann

Rachel Mann, an associate at the firm, is part of a team of attorneys advising employee benefit plan sponsors and administrators on matters related to employee benefits. He has published numerous articles on environmental, social, and governance (ESG) regulation and health care reform. She is based in the firm’s Philadelphia office and can be reached at [email protected]

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