ESG Investing Regulations Across the 50 States

Environmental, social, and governance (ESG) investing has been an area of focus for investors in recent years. ESG investing has also been the target of regulators around the globe. In the United States, the industry awaits a final ESG disclosure rule for funds and advisers from the US Securities and Exchange Commission, while the US Department of Labor recently eased ERISA-regulated retirement plan fiduciaries’ paths to considering certain ESG factors in making investment decisions. At the state level, ESG investing continues to be a hot-button issue as state legislatures debate the relevance and materiality of ESG factors and issue varying regulations and state attorneys general threaten use of their investigative and enforcement authority to advocate for one side or the other of the debate.

As of September 4, 2023, there are 20 states with effective “anti-ESG” rules (i.e., rules that seek to limit considerations of, and/or the weight given to, ESG-related factors in investment decisions and/or discourage such investments). There are eight states with effective “pro-ESG” rules (i.e., rules that seek to protect, and in some cases, incentivize ESG-related investments). Three states have enacted disclosure-related ESG regulations.

More than 75 additional anti- or pro-ESG bills are pending in current state legislative sessions across the United States. In all, 41 states have either effective or pending ESG investing rules. The scope, structure, and effects of these state-level rules vary widely and frequently require interpretive analysis to put compliance into practice.

Note: The split colors in Texas and New York indicate those states have multiple types of proposed or enacted ESG rules—one or more supporting ESG investing and one or more opposing ESG investing.

FIVE TYPES OF STATE ESG RULES

These ESG rules can be generally placed into five categories.

Anti-ESG Rules

1: No Boycott Legislation

This type of anti-ESG rule directs state entities to divest from and refuse to contract with companies that boycott certain industries, such as fossil fuels or firearms. For example, Alabama has enacted S.B. 261 into law, which prohibits most government entities from contracting with certain companies that boycott companies either based on their ties to certain industries, including fossil fuel and firearms, or based on their not meeting certain environmental or social targets regarding, for example, greenhouse gas emissions or board diversity.

2: Prohibition on ESG Discrimination

This type of anti-ESG rule prohibits state entities from contracting with companies that state officials determine are “discriminating” against certain industries, including firearms or fossil fuels. For instance, Idaho passed H.B. 191 into law, which provides that a public entity cannot accept or deny bids for contracts over $100,000 based on ESG factors.

3: Prohibition on ESG Consideration

This type of anti-ESG rule prohibits the consideration of ESG factors or the pursuit of ESG-related goals when making state-sponsored investments.

• Some of these laws, like Indiana H.B. 1008, include public statement provisions. These types of provisions delineate the types of communications, marketing materials, or industry commitments (e.g., a company’s status as a signatory to the Climate Action 100+ or Net Zero Asset Management initiatives) that a state enforcement agent may use as evidence of an investment manager’s prohibited ESG considerations.
• Others, including Arkansas H.B. 1253, include provisions that restrict state funds from delegating proxy voting authority to third parties unless the third party has a practice of, or commits in writing to, following established guidelines to only consider pecuniary interests.

It must be noted that none of the currently enacted “anti-ESG” regulations prohibit or seek to discourage ESG-related investment where such investment is made strictly as a result of financial considerations and analysis of the investment. Accordingly, the political aim of many of these regulations seem to be focused on the dissuasion of ESG considerations as their own end.

Pro-ESG Rules

4: ESG Consideration Requirement

This type of pro-ESG rule requires the consideration of ESG factors in investment decision-making. Some of these laws, such as Colorado S.B. 16, specifically require public employee retirement fund managers to consider certain ESG factors when making state-sponsored investments. Other states have passed laws with a broader scope, requiring consideration of ESG factors in investment decision-making for all state and local government authorities and public corporations that manage public funds.

5: ESG-Based Investment Prohibition

This type of pro-ESG rule prohibits investment managers of public funds from investing in specific industries that are harmful to ESG-related efforts. For example, California S.B. 185 requires the boards of the Public Employees’ Retirement System and the State Teachers’ Retirement System to divest from thermal coal companies. Some state legislatures have submitted pending legislation to require divestiture from industries deemed harmful to society, such as the firearms industry.

HOW WE CAN HELP

The conflicting and dynamic web of ESG investing regulations may create headaches for investment providers seeking to serve different state investment funds. To add to that complexity, states continue to propose and adopt new rules and trends.

To ensure that our clients are armed to navigate this continuously and quickly evolving legal environment, Morgan Lewis maintains a detailed chart with proprietary analysis of each state’s ESG-related legislative efforts, updated and emailed to subscribers monthly. To learn more about this offering or discuss any specific questions, please email the authors of this Insight or your usual Morgan Lewis contacts.

Summer associates Yara Ismael and Jacob Hermansen contributed to this LawFlash.