Highlights

  • Florida Gov. Ron DeSantis recently signed a law that prohibits the use of environmental, social and governance (ESG) factors in state and local investment decisions and government contracting processes.
  • Effective July 1, 2023, the legislation applies to all funds invested by state and local governments - including general revenue, trusts dedicated to specific purposes, retirement plans and surplus funds.
  • Failure to observe the law can result in enforcement that includes orders for corrective action, financial penalties or suspension or revocation of licenses.

Florida Gov. Ron DeSantis on May 2, 2023, signed into law CS/CS/HB 3, which passed the Florida Legislature during the 2023 regular session and becomes effective on July 1, 2023. CS/CS/HB 3 - now codified at 2023-28, Laws of Florida - was a priority of House Speaker Paul Renner, and it expands upon previous actions by the governor and cabinet that required investment decisions to prioritize returns on investments without consideration of environmental, social and governance (ESG) factors.

This new law will prohibit the use of ESG factors in state and local government investment decisions and government contracting processes. It also could subject financial institutions to administrative sanctions if they are found to engage in an unsafe and unsound practice.

Government Investment and Procurement

The new law pertains to all funds invested by state and local governments, including general revenue, trusts dedicated to specific purposes, money held by retirement plans and surplus funds. It requires that investment decisions, including written policies and the exercise of shareholder rights, must be driven solely by pecuniary factors. The term "pecuniary factor" is defined as a factor that is expected to have a material effect on the risk or return of an investment based on appropriate investment predictions that are consistent with applicable investment objectives and funding policies. The term does not include the consideration of any social, political or ideological interests. The Florida attorney general is authorized to bring civil or administrative actions to enforce provisions of the new law.

Additionally, the new law prohibits both the state Division of Bond Finance and specified public bond issuers from issuing an ESG bond, paying for the services of another to verify or certify a public bond as an ESG bond, or contracting with rating agencies that use ESG scores in a manner that directly impacts the issuer's bond ratings.

For government contracting, the bill prohibits all units of state and local government from: 1) considering social, political or ideological beliefs when evaluating prospective vendors, or 2) giving any preference to a vendor based on social, political or ideological beliefs.

State and local governments may deposit funds only in banks and savings associations that have been designated as a Qualified Public Depository (QPD). Beginning July 1, 2023, the law will prohibit certification as a QPD if a bank has engaged in an "unsafe and unsound practice" by denying or canceling services, or discriminating against a person in making its services available, based on political beliefs or affiliations, religious beliefs or affiliations, business sector, or any other factor that is not a quantitative, impartial, risk-based standard, or applying social credit scores. QPDs will be required to certify compliance with this requirement.

Florida Regulation of Financial Institutions

Under the Florida Financial Institutions Code, the Florida Office of Financial Regulation (OFR) may impose administrative sanctions on financial institutions that engage in "unsafe or unsound practice." Such administrative penalties can include an order requiring corrective action, a financial penalty, or suspension or revocation of a license. The new law will expand the definition of "unsafe or unsound practice" on July 1 to echo the definition described above. This includes denying or canceling services or otherwise discriminating against a person in making its services available, based on political beliefs or affiliations, religious beliefs or affiliations, business sector, or any other factor that is not a quantitative, impartial, risk-based standard, or applying social credit scores. The new law also provides that a financial institution licensed by the OFR that engages in an "unsafe or unsound practice" has violated the Florida Deceptive and Unfair Trade Practices Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.