ESG Top of Mind as New State Attorneys General Flex Powers (1)

New state attorneys general have quickly found themselves in the ESG wars, with many officials deploying their broad investigative and enforcement powers just weeks on the job.

New Republican attorneys general in Iowa, Arkansas and several other states already are challenging environmental, social and governance investing with a lawsuit against the Labor Department and a letter that assailed proxy advisory firms Institutional Shareholder Services Inc. and Glass, Lewis & Co., among other actions. On the Democratic side, Arizona’s new attorney general, Kris Mayes said Monday her state would exit ESG investigations into big banks and other financial firms that her Republican predecessor probed.

The speed in which new Republican attorneys general have jumped on ESG isn’t surprising given how public and polarizing the topic has become, said Jason Downs, a co-chair of the state attorneys general and ESG groups at Brownstein Hyatt Farber Schreck LLP. Attorneys general can fight ESG in ways that even a House with a new Republican majority can’t, he said.

“State attorneys general hold the most power because of their enforcement authority,” Downs said.

Republicans have repeatedly warned the Securities and Exchange Commission, asset manager BlackRock Inc. and others that their ESG investing policies and rules may violate state and federal laws. ESG is a top-of-mind issue for Republican attorneys general when they talk, said Iowa Attorney General Brenna Bird, who ousted a Democratic incumbent.

“It does tend to come up quite a bit,” Bird told Bloomberg Law. “The level of engagement is certainly increasing.”

Republican Attacks

In January, Republican attorneys general from 21 states challenged Glass Lewis and ISS over the firms’ voting advice to shareholders considering proposals on climate change, board diversity and other ESG issues at companies’ annual meetings. The letter says the firms’ recommendations aren’t material to investors and “may threaten the economic value” of their states’ investments and pensions. Both firms have disputed the claims from the attorneys general.

Arkansas’ Tim Griffin was among the six new attorneys general who signed the letter. It went out a week after Griffin became attorney general.

ESG awareness is growing among his constituents, who are worried, Griffin told Bloomberg Law. ESG can hinder a company’s ability to operate efficiently and innovate, he said.

“I’ve heard all the arguments about, well, no, this is another way to reach value, right? This is another way of viewing value as opposed to ‘values,’” Griffin said. “I don’t buy it.”

Republican attorneys general teamed up again on a lawsuit to block a Labor Department retirement investment rule that enables private-sector employers to consider ESG factors when choosing pension investments. The lawsuit, filed in the US District Court for the Northern District of Texas in January, alleges that the rule prioritizes “ill-defined” ESG concepts. A senior Labor Department official said the rule isn’t an investment mandate and only was intended to clarify that ESG factors were as important as any other material risk-return consideration, but not more so.

Absent from the letter and the litigation were newly elected Republican attorneys general Marty Jackley of South Dakota and Gentner Drummond of Oklahoma.

Drummond still plans to join the lawsuit, according to a spokesperson for the attorney general. A representative for Jackley didn’t provide a comment.

Republican attorneys general likely will closely watch companies’ public statements and motivations around ESG as they look to launch more attacks this year, Downs said.

“I think any of those statements will feature front and center in a Republican enforcement action,” he said.

BlackRock, SEC Concerns

The lawsuit and the letter are among the latest attacks in a years-long campaign against ESG by Republican attorneys general.

Kentucky Attorney General Daniel Cameron has called ESG a movement “that would destroy the Commonwealth’s competitive advantage and cripple our economy,” and Texas Attorney General Ken Paxton has said that “too many consumers and investors have been hurt by the woke ESG movement’s obsession with radical social change and willingness to ignore the law,” for example.

Paxton joined Missouri and several other Republican-led states last year in demanding that credit rating giant S&P Global Inc. turn over documents related to how it develops ESG credit indicators, scores and valuations. That followed that launch of a similar Republican probe in Missouri by then-Attorney General Eric Schmitt into financial research provider Morningstar Inc. over its evaluations of companies’ ESG performance.

The attorney generals have suggested that the companies are engaging in unfair trade practices and violating state consumer protection laws. S&P Global and Morningstar have stood by their ESG ratings.

Republican attorneys general last year also sent letters warning BlackRock about what they called its “quixotic climate agenda” for investment management and raising concerns with the SEC about what they saw as agency “mission creep” to create corporate climate disclosure rules. BlackRock and SEC officials have defended their work on ESG, saying their actions are legal and benefit investors.

In one letter, West Virginia Attorney General Patrick Morrisey threatened to sue the SEC if it requires companies to report on their greenhouse gas emissions and other ESG matters, saying such moves by the agency would overstep its authorities.

Griffin and Bird share Republicans’ concerns with the SEC’s plans. Griffin said he will review what he might have a legal basis to challenge when the rules are finalized in the coming months, as he looks to participate in more battles against ESG.

“I plan on being very active in this space,” Griffin said.

Democrats Speak Out

Democratic attorneys general have been far less vocal on ESG than Republicans, though they have pushed back at times against the volley of Republican moves countering ESG.

On Monday, Mayes said she wouldn’t participate in “politicized investigations into the environmental sustainability efforts of major financial institutions.” She replaced Republican Mark Brnovich, who frequently assailed ESG.

“Corporations increasingly realize that investing in sustainability is both good for our country, our environment, and public health and good for their bottom lines,” Mayes said in a statement. “The state of Arizona is not going to stand in the way of corporations’ efforts to move in the right direction.”

In 2022, Democratic attorneys general including Karl Racine of D.C., Letitia James of New York, and Rob Bonta of California sent a letter to Congress pushing back against their Republican counterparts’ attacks on ESG. The Democrats’ letter said ESG factors are “like any other material factors” that inform investment decision-making. Several Democratic attorneys general also sent a letter to the SEC last year supporting the regulator’s climate disclosure proposal.

Democrats are worried about ESG, but their concerns are focused more on getting clarity around the issue and ensuring regulators like the SEC act on it, said Downs, who served as chief deputy attorney general under Racine.

“I wouldn’t say that Democrats are just completely silent on the issue,” he said. “I just would say that we’re not seeing the enforcement actions from Democrats.”