PREPARING FOR THE INCREASINGLY COMPLEX MAZE OF STATE-LEVEL REGULATIONS REGARDING ESG-BASED INVESTMENTS
Amid growing interest by some investment managers to consider environmental implications and anticipated regulatory change in their portfolios, Environmental Social Governance (ESG) investments are also increasingly catching the attention of state regulators. Along with public warnings from state attorneys general, some states are reacting by barring major banks from government contracts and pulling money from asset managers they deem as overstepping on climate action.
Before determining an investment strategy, companies should consider the recent flurry of state legislation, especially around climate change, governance and social impacts. For example, this year, West Virginia enacted a law giving the state treasurer the authority to bar financial institutions from doing business with the state where they are "boycotting" fossil fuels. Texas and Oklahoma have enacted similar laws while comparable bills are pending in approximately 15 other states. Additionally, the governor of Florida recently introduced legislative proposals that would ban state pension funds from selecting investments based on ESG factors.
On the other side of the political spectrum, several other examples demonstrate the marked uptick in state-level legislative activity occurring surrounding ESG investment decision-making.
- A bill pending in California (SB 1173) applies to the boards of the Public Employees' Retirement System and the State Teachers' Retirement System. It would prohibit investments in the 200 largest publicly traded fossil fuel companies.
- A similar bill is pending in Vermont (251) that would divest state pension funds from fossil fuels.
- Recently, Connecticut passed a law that applies to the Connecticut Retirement Plans and Trust Funds regarding "Responsible Gun Policy." Connecticut's law prohibits investment in civilian firearms manufacturers.
Regardless of where company leadership falls on the political spectrum or its sentiments regarding ESG, it should consider state-level regulatory risks regarding its practices and policies. Indeed, state attorneys general have several sources of authority relevant to companies engaging in ESG investing, several of which are outlined below:
Antitrust. State attorneys general have historically used their antitrust jurisdiction to challenge practices deemed to be anticompetitive. Along those lines, the Federal Trade Commission makes clear that "[s]tate attorneys general can play an important role in antitrust enforcement on matters of particular concern to local businesses or consumers. They may bring federal antitrust suits on behalf of individuals residing within their states ('parens patriae' suits), or on behalf of the state as a purchaser. The state attorney general also may bring an action to enforce the state's own antitrust laws. In merger investigations, a state attorney general may cooperate with federal authorities." Thus, any statement from state attorneys general raising antitrust concerns over mission-related investment practices should not be interpreted as mere hyperbole given the broad antitrust authority they wield.
- Duty of Loyalty. Some state attorneys general have set forth concerns regarding the duty of loyalty related to public retirement plans. Many attorneys general, in both red and blue states, have this statutory authority.
- Securities. Some state attorneys general have authority specifically related to securities. For example, the New York Attorney General's Investor Protection Bureau is particularly active in enforcing the Martin Act. The law gives the NYAG's office broad authority to conduct investigations regarding the offer, sale or purchase of securities.
- General Authority. State attorneys general have authority related to ESG even without passing new legislation. Additionally, state attorneys general often coordinate with federal enforcers. For example, on Aug. 2, California Attorney General Rob Bonta and 16 other state attorneys general submitted a letter to the U.S. Environmental Protection Agency urging it to grant a waiver of preemption from the EPA allowing California to enforce emission standards that are more stringent than currently applicable federal standards. Also, many state attorneys general have units specifically dedicated to environmental justice (e.g., the Colorado Attorney General's Office has a Natural Resources and Environment Section and Maryland's Department of the Environment makes publicly available enforcement actions brought by state regulators, including the Maryland Attorney General's Office).
Given the above examples, companies would be wise to consider the existing authority of state regulators as it relates to ESG. This labyrinth of ESG state-level legislation and the breadth of existing regulatory authority indicates companies should consider whether to proactively engage with governors, state attorneys general and legislatures in states in which they do business. Additionally, companies may benefit from assessing and preparing for litigation risk regarding their ESG practices prior to setting an investment strategy.
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