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

August 24, 2022 – Interest in environmental, social and governance (ESG) investing has exploded in recent years and, at the same time, caught the attention of global regulators. Given the ambiguity in terminology around ESG, some global regulators are concerned that investment managers may be “greening” 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 disclosure rules for US mutual funds and the conditions under which such funds may be approved. names that suggest an ESG focus.

In recent months, this regulatory interest has expanded to include individual states opening their own fronts regarding ESG investment regulation. Some of these states are using their legislative power to limit ESG investing, citing concerns that ESG investing is putting policy and social objectives ahead of financial objectives, or even concerns about the impact that ESG investing may have. in their local economies. Several states have proposed or enacted new legislation that would prohibit or significantly restrict their state governments from investing in ESG strategies or doing business with financial institutions that adopt specific ESG policies (Anti-ESG Laws).

Sign up now for FREE unlimited access to

A table of Anti-ESG bills is shown below:

Source: chart created by the authors

Types of Anti-ESG Bills

These Anti-ESG bills vary considerably from country to country. Almost all state Anti-ESG bills require state entities to take certain anti-ESG actions, be it divesting from companies that engage in ESG investing or refusing to contract with companies that engage in ESG discrimination (the definition of which varies somewhat from state in -state). Anti-ESG bills vary based on their scope, the state entities they regulate, the specifics of what they require, and the types of entities they target. Despite the wide variation, there are generally two main categories of Anti-ESG bills.

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

Boycott bills are most often attached to “discrimination” against fossil fuel-related energy companies, but some states have also targeted companies that “boycott” mining, production agriculture, or timber production. These boycott bills are based on the premise that companies that refuse to do business with companies headquartered in a particular state are indirectly harming the citizens of that state and therefore should not benefit from (i) direct state investment in the company such or (ii) business contracts from the state.

In general, boycott bills require certain elements of the state to decide on entities that “boycott” or “discriminate” against the respective issuers. With respect to these entities, the state may be required to divest companies that engage in ESG-related discrimination (eg, one of Oklahoma’s Anti-ESG bills (HB 2034) requires state government entities to divest all publicly traded securities of financial companies that boycott energy companies).

Additionally, entities contracting with the state may be required to include verifications/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 the Bills of Boycott. Some states have Anti-ESG bills that mandate only one of the above actions, and other states have bills that mandate both.

The 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 take “social” factors into account for any purpose other than maximizing investment returns.

Scope of Anti-ESG Bills

The scope of Anti-ESG bills may also vary, depending on the type of bill. For example, legislation recently passed in Texas applies to five specific public pension funds and the permanent school fund in relation to the requirement to divest financial institutions that boycott energy companies, but the contractual requirements apply to any state agency of Texas or political subdivisions. of Texas.

Importantly, all these Anti-ESG bills are limited in their application to the activities of state entities; they do not affect the ability of private investors, on their own accounts, to select ESG-related investment strategies or to invest in a particular entity, even those deemed to be subject to an applicable state restriction.

Furthermore, Anti-ESG bills vary in terms of 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 statutory: it allows a state entity to refuse to contract while not requiring that he refuse to contract.

Implications for investment managers

Both types of Anti-ESG bills present discrete problems for ESG investment managers. For example, an ESG investment manager seeking to offer an attractive investment product to investors who desire a more environmentally or socially conscious investment product may offer an investment strategy that avoids investments in fossil fuel producers, firearms companies, or companies that do not implement sustainable forestry. practices.

These Anti-ESG bills could result in states being prohibited from investing in such a product and, potentially (depending on how the law is interpreted), from engaging the ESG investment manager to manage any of the state’s assets. even in non-ESG-related investment products.

Furthermore, investment managers who do not necessarily see themselves as ESG managers may nevertheless be affected by these Anti-ESG bills. Many investment managers are recognizing that ESG criteria, including an issuer’s environmental impact, can be important factors in investment decision-making.

In fact, this recognition supported the SEC’s recent 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 posed by these Anti-ESG bills centers on the question of whether implementing an investment strategy that takes into account ESG risks rises to the level of effectively “boycotting” a particular industry or issuer or makes the strategy an inappropriate “social” strategy for state investments. .

Investment managers navigating these complex waters should understand that these Anti-ESG bills are new and, as such, pose 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 rather than its investment products. If an investment manager offers an ESG-style fund by making it clear that as a company it does not discriminate against the entire fossil fuel industry (eg, it does not completely ban all investments in the fossil fuel industry, it does not refuse to sign deals for the fossil fuel industry), the investment manager himself should not be considered to be “boycotting” energy companies, although his product may be.

In addition, and as mentioned above, there is considerable variation from country to country. 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 Laws that restrict state contracting to companies that refuse finance energy companies, but have no legislation related to the firearms 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 are that they discriminate against the firearms industry, but no legislation regarding the energy industry.


The regulatory environment for ESG investing was already complicated, given the involvement of several global regulators and an ever-growing menu of ESG standard setters. With the arrival of Anti-ESG bills from several US states, the regulatory implications of ESG investing are now even more complex, especially when certain ESG activities may result in the inability to do business with individual state governments. Unfortunately, this appears to be a trend that may accelerate—and increase complexity in the field—before it slows down.

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

Sign up now for FREE unlimited access to

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, according to 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 more than 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 the regulations applicable to investment managers. He is well versed in creating investment products and environmental, social and governance (ESG) and sustainability issues.

Elizabeth Goldberg

Elizabeth Goldberg, a partner at Morgan, Lewis & Bockius LLP, advises employee benefit plan sponsors and service providers to those plans (including financial services firms) on US Department of Labor ERISA enforcement investigations ( DOL), DOL ERISA regulatory affairs and ERISA fiduciary counseling 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 who advise employee benefit plan sponsors and administrators on issues related to employee benefits. She 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].

Leave a Comment

Your email address will not be published. Required fields are marked *