State AGs Attacking ESG Are Flirting With Ethics Violations

The rise of environmental, social, and governance factors in private sector shareholder, financing, and consumer decisions has spurred a conservative backlash that’s accelerating in the second Trump administration.

This response has mutated from being bad policy of questionable legality to possibly violating legal ethics, including by some state attorneys general. Such ethical concerns simply can’t be ignored or glossed over and ultimately may provide a check on government efforts to stamp out ESG completely.

The first wave of anti-ESG action, took the form of state legislation seeking to prohibit consideration of “social” factors by certain investors or prohibiting state entities from using businesses that “boycotted” favorite state industries such as fossil fuels. By August 2022, Morgan Lewis counted 21 state anti-ESG bills of some type in 16 states.

These pieces of legislation have been criticized as bad policy that violates a host of specific legal requirements. A Texas law blocking business with firms that “boycott” fossil fuel interests caused municipalities in the state to incur an estimated $500 million in extra interest in the first eight months it was in effect. In another example, a federal court ruled that Missouri’s anti-ESG law violated the First Amendment (among other legal problems).

House Judiciary Committee ranking member Jim Jordan (R-Ohio) jumped on the backlash bandwagon in late 2022, sending information request letters to CA100+ and Ceres, two organizations that support investment in clean energy. The letters alleged that “ESG is merely partisan politics masquerading as responsible corporate governance” and that “[c]orporate America’s collusion in pursuit of ESG goals may violate federal or state antitrust laws.”

State attorneys general went on offense against several companies starting in 2023, suggesting that heretofore acceptable behavior might be problematic and illegal.

Led by Texas’ Ken Paxton, 10 state AGs sent a letter to JPMorgan Chase, Bank of America, Morgan Stanley, Goldman Sachs, Citigroup, and Blackrock, warning that some of the businesses’ practices involving diversity, equity, and inclusion and ESG may violate some state or federal laws.

Eleven state attorney generals (again led by Paxton) later filed lawsuits against these companies alleging that three of the world’s largest asset managers (Blackrock, State Street, and Vanguard), used their power to influence the policies of top US coal producers and, in turn, to “affect a substantial reduction in competition in coal markets,” violating antitrust and consumer protection laws.

As recently as last month, Paxton indicated he will begin investigating US proxy firms for failing to follow a new Texas anti-ESG law that already has been enjoined by a federal court as unconstitutional.

Here’s where potential ethical problems come in. To practice law, all attorneys (including state attorneys general and any other government attorney) are subject to state legal ethics rules that, among other things, require honesty, competence, and acting in a client’s best interests. Though ethics law is murky on the nature of the client for government attorneys, it’s clear that it includes the public interest.

It isn’t clear that characterizations of ESG by many of its political opponents are factually accurate. It’s fair to question the competence of ESG’s critics who can’t point to hard evidence to support their position. And preventing an investor in the public sector from making the best investment decision acts against the interests of the citizens of the state.

Just as political polarization has led to disputes about truth, so too perhaps is the polarization over ESG investing. US investors continue to scrupulously insist that their use of ESG investing is for the material benefits of their clients, and the positive rate of return on ESG investing doesn’t suggest otherwise.

In just the last few months, the nation’s largest shareholder advisory firms sued to prevent enforcement of a Texas law that would require them to possibly misstate the nature of their ESG advice. Such a requirement would impede these firms’ ability to share accurate information about climate risks, which would in turn violate their fiduciary duties and hurt corporate shareholder interests.

Attorneys who claim that ESG investing is a radical left-wing undertaking, and act to shut down advice on climate risks, seem perilously close to violating the rules prohibiting dishonesty, requiring competence, and acting in the public’s best interest.

Ethics complaints are easy to file, and attorney ethics complaints against attorneys working for President Trump are now numerous, primarily due to dishonesty and mischaracterization of evidence. It’s possible that ethics complaints for ESG political warfare could explode as well, and for many of the same reasons.

Everyone can have an opinion, and everyone can participate in policy debates. And though politicians can lie, attorneys shouldn’t.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Victor B. Flatt is the Coleman Burke Chair in Environmental Law at Case Western University, and a member scholar of the Center for Progressive Reform.

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