Wall Street Suit Over ESG Curbs Survives Missouri Bid to Ax Case

A Wall Street challenge to Missouri’s high-profile environmental, social and governance investing constraints can proceed in court after a federal judge rejected the state’s attempt to scuttle the case.

The Securities Industry and Financial Markets Association had grounds to allege the Missouri ESG rules inappropriately preempted federal law giving the Securities and Exchange Commission the power to regulate investment firms, Judge Stephen R. Bough of the US District Court for the Western District of Missouri said in an order Friday. The Missouri rules require asset managers to get written consent from clients in the state before using any “social and/or nonfinancial objectives” when investing. They are part of a growing line of Republican attacks against ESG considerations in investment decisions.

“This Court can hear preemption claims,” Bough said.

SIFMA sued Missouri Secretary of State Jay Ashcroft (R) in August, saying the rules are “burdensome state regulation that Congress prohibited.” Ashcroft asked the court in October to toss the case, arguing SIFMA did not have a valid claim against the rules.

Ashcroft said he was disappointed the judge didn’t dismiss the lawsuit and will continue defending the rules.

“SIFMA can’t win this in the end,” Ashcroft told Bloomberg Law.

A SIFMA representative didn’t immediately respond to a request for comment.

Republican Concerns

The decision to let the case proceed came after Raymond James Financial Inc., Edward D. Jones & Co. and other SIFMA members told the court in October that they have “incurred and will likely incur additional financial costs to comply with the New Rules that would be avoided if the New Rules’ enforcement were enjoined.” (Bloomberg Law is operated by entities controlled by Michael Bloomberg, the founder and majority owner of Bloomberg LP, which is an associate member of SIFMA. Bloomberg LP didn’t file a statement in connection with the case.)

Big asset managers—including BlackRock Inc., The Vanguard Group Inc. and State Street Corp.—have faced repeated attacks from Republican state and federal officials claiming the firms embrace ESG investing at the expense of higher financial returns for their clients.

Missouri’s rules are “far removed from the type of security-focused state regulation” federal law preempts, Ashcroft’s lawyers told the court when he sought to dismiss the case last year.

Investment advisers and brokers must obtain their customers’ written permission when making investment decisions on matters such as “socially responsible criteria,” “social or environmental goals,” and “corporate governance structures based on social characteristics,” according to Missouri’s regulations, which are under headings labeled, “Dishonest or Unethical Business Practices.” The rules took effect in July.

The case is Securities Industry and Financial Markets Association v. Ashcroft, W.D. Mo., No. 2:23-cv-04154, motion to dismiss denied 1/5/24.