Anti-ESG Movement Gets Much Hype But Few Big Wins in Statehouses

A new coalition of GOP governors vows to buck the Biden administration’s approach to ESG policymaking with a state-level crackdown on ideological investment decisions and company practices, but the legislative fate of their attacks has varied across the country.

West Virginia and Utah are among states with laws enacted this year against environmental, social, and governance practices deemed by Republicans to punish certain industries or favor non-financial goals in investing. Elsewhere, Arkansas legislators narrowed the scope of an anti-ESG proposal ultimately signed into law, while two bills failed in Wyoming due to concerns over their impacts.

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The anti-ESG alliance launched last month by 19 Republican governors follows a range of state actions in response to how companies consider factors such as climate change and diversity issues in their investments and policies. Legislative debates over how new state restrictions could affect public pension systems or lead to unintended consequences highlight the challenges of putting their directives into practice.

Meanwhile in Democratic legislatures, pension considerations are also on the table for bills in California and Vermont that seek divestment from fossil fuel companies.

More anti-ESG bills are moving through legislatures than pro-ESG proposals, said Leah Malone, a Simpson Thacher & Bartlett LLP partner who leads the firm’s ESG and sustainability practice. In some states, scaled-back anti-ESG bills appear “more likely to win the day” compared to broader or more stringent approaches, she said in an email.

“At the end of the day, state legislators want to know that their state’s pension investments will grow and produce returns to fund state employees’ retirement,” Malone said. “Those broad restrictions really limit the state’s ability to invest its pension assets successfully.”

‘Minimum Impact’

Governors of states including Florida, Montana, and Wyoming formed their alliance in March before President Joe Biden vetoed federal legislation to overturn a rule allowing workplace retirement fund managers to consider ESG factors. The governors said in a joint statement that “freedom loving states” will unite on efforts such as preventing the use of ESG in investment decisions in state systems and prohibiting banks from considering such factors in lending practices.

Legislation introduced in their states this year has aligned with that vision, but approaches and outcomes vary. In Florida, lawmakers have advanced sweeping proposals (H.B. 3 and S.B. 302) to prevent the use of ESG factors in state decision making, which would also cover state and local governments issuing bonds.

In Arkansas, a law (H.B. 1307) signed March 30 was narrowed to limit the effects on the retirement system, lead sponsor Rep. Jeff Wardlaw (R) said during a March legislative debate. The law requires divesting public funds from financial services providers found to discriminate against certain industries such as oil and gas, but an exemption applies in some cases when the move would “cause a negative financial impact to the state.”

“We still want to make sure that we get our point across and these folks are not discriminating against the firearm industry and against the oil industry but we’re doing it at a very minimum impact,” Wardlaw said.

A West Virginia law (H.B. 2862) signed March 28 includes a similar exception to the requirement that all shareholder votes for the state’s holdings can only consider financial factors and not further any non-financial interest. A waiver will apply if compliance increases costs or affects the quality of available services.

Pension and business concerns thwarted some anti-ESG efforts this year.

A Wyoming House committee voted against two measures (S.F. 159 and S.F. 172) limiting state contracts and the investment of state funds over fears that vague provisions could cause the state to lose money.

The sponsor of a failed North Dakota measure (H.B. 1347) to restrict state business with financial institutions found to boycott fossil fuel companies acknowledged the measure would unintentionally target local banks that support the oil and gas industry because of the way it was drafted. State lawmakers there are still considering other ESG requirements.

Climate Risk

The financial industry is the most affected by state ESG legislation, said Jason Halper, partner and co-chair of global litigation group at Cadwalader, Wickersham & Taft LLP. Companies will have to decide how to engage with states if they ultimately end up on a list of those boycotting energy companies, for instance, Halper said.

“The definition of boycott is somewhat murky, and the targets of that feel it’s unjustified,” he said.

Elsewhere, some Democratic lawmakers are pushing bills that focus on climate risk. A California greenhouse gas emissions measure (S.B. 253) is a notable approach to ESG for “setting broader requirements than the proposed SEC climate disclosure rules” for companies, Malone said.

State measures to consider the investment risks of climate change, such as a Colorado proposal (S.B. 16), are a “very prudent course of action” and could act as a counter pressure to the actions of Republican states, said Jordan Haedtler, one of the authors of a brief on climate risk and state pension funds from the Roosevelt Institute, a progressive think tank. The Colorado measure aiming to reduce greenhouse gas emissions would require the state retirement fund board to align with those goals via proxy voting and detail climate-related investment risks and management in an annual report.

Multinational companies are used to balancing different laws and standards, but ESG regulation “poses an interesting problem of bifurcating approaches” between the US and much of the rest of the world, Malone said. Pushback in the US won’t slow momentum toward more disclosures and heightened requirements globally, she said, but state action will likely complicate the picture.

“With different states approaching the issue in wildly different ways, it will be impossible for companies to please them all,” Malone said.