ESG Investing Laws Diverge in Red and Blue States: Explained

More than a dozen states across the country are implementing new ESG laws that in most cases curb use of the factors in investments, contracts, and other areas.

Most of the action is in Republican-led states, where lawmakers have restricted environmental, social, and governance considerations—such as addressing climate change—in a range of state and corporate actions. Meanwhile, Democrat-led states including Illinois and Colorado enacted laws requiring additional disclosures on investment risks and sustainability.

The laws create a range of new requirements for asset managers and other businesses in addition to public pension administrators and state agencies. Other state proposals related to ESG faltered this year, making it likely that the legislative push will continue into 2024.

1. How did state legislatures restrict the use of ESG factors this year?

New state laws vary in their approach to limiting ESG considerations in decision-making. Most requirements focus on state pension plans or other investments, proxy voting, and state contracts. Some laws, in states such as Montana, require that investment decisions only be made based on financial factors. Laws in Utah and elsewhere penalize companies deemed to boycott certain industries based on ESG factors.

Proponents argued the use of ESG factors unfairly disadvantages industries such as oil and gas, while opponents warned about unintended consequences in limiting ESG considerations and encroaching on private business decisions. Some states watered down their initial proposals, particularly in cases where state pension plans projected losses.

In notable new laws, Florida enacted sweeping anti-ESG requirements—including for public and state-controlled funds—that took effect July 1. Texas limited the use of ESG in the insurance industry with a law that takes effect Sept. 1.

Groups opposing the new requirements have tracked coordination in anti-ESG legislation among conservative think tanks such as the Heritage Foundation. New laws are in addition to actions by state attorneys general, treasurers, and other officials against ESG.

2. Where will anti-ESG laws go into effect?

More than a dozen states enacted anti-ESG laws this year, and many took effect in recent months. States with new laws include Alabama, Arkansas, Florida, Idaho, Indiana, Kansas, Kentucky, Montana, New Hampshire, North Carolina, North Dakota, Texas, Utah, and West Virginia, according to a report by Pleiades Strategy, a research and advisory firm that tracked anti-ESG bills.

Among the new laws, measures in Kansas and Kentucky limit the use of ESG in public retirement system investments. An Indiana law took effect July 1 to prohibit the public retirement system from contracting with service providers that make ESG commitments.

An Idaho law that took effect July 1 prohibits banks and credit unions that hold state funds from boycotting certain industries, including fossil fuels and guns. The law defines a boycott as penalizing or limiting services in some sectors without a “reasonable business purpose.”

3. How will states implement the new laws?

The laws enacted this year include various requirements for implementation. Some require state officials to decide if a company is following the law based on their business practices. Others, such as the Idaho law, require companies to proactively affirm they don’t engage in a state-defined boycott of certain industries or other ESG-related practices.

State retirement systems have their own requirements for compliance under the laws. In Kansas, the Kansas Public Employees Retirement System has implemented the state’s new law and “sees no issues in fully complying,” communications officer Emily Wilson said in an email. The system hired a proxy voting service and amended its investment policy statement, she said.

The Indiana Public Retirement System is developing processes “which will further bolster our investment stewardship practices, ensuring that INPRS assets are invested solely for the financial benefit of our members,” Dimitri Kyser, strategic communications program manager, said in an email. Utah Retirement Systems declined to comment on implementing the state’s new requirements.

In Florida, the State Board of Administration is updating its processes to implement the state’s law, Deputy Executive Director Paul W. Groom II said in an email. The organization invests “to maximize the risk adjusted return of the fund and discharges its duties for the sole benefit of the plan’s participants and beneficiaries,” he said.

4. What are Democratic-led states doing on ESG?

Democratic lawmakers have also proposed measures that would impact state pension funds, such as requiring divestment from fossil fuels. A notable divestment proposal in California stalled this year, though advocates have said they will continue to push the idea. Golden State lawmakers also proposed this year new greenhouse gas emissions and climate risk reporting requirements for some companies.

Elsewhere, states have enacted pro-ESG disclosure measures. An Illinois law requires sustainability disclosures for investment managers that work with public pensions. In Colorado, the state’s public retirement association must report climate risk under a new law.

Outside of pension investments, Democrats have also pushed for green banks and other measures to address climate change.