TAKEAWAYS

  • Governor DeSantis has signed a law prohibiting reliance on environmental, social and governance (ESG) for Florida's funds.
  • Banks and financial institutions could face administrative sanctions if found to discriminate based on religious, political or social beliefs.

As many financial institutions and investment managers move towards integrating environmental, social and governance (ESG) factors into their decision making, Governor DeSantis signed a new law that prohibits reliance on ESG when it comes to Florida's funds.

The law will impact the investment of the state's billions of dollars. The Bill Analysis states, "The State Board of Administration (SBA) was created by the Florida Constitution and serves as the state's independent investment management organization, with authority over 30 funds collectively valued at about $228 billion as of June 30, 2022."

According to the governor's office, the new law will:

  • "Block the use of ESG in all investment decisions at the state and local level;"
  • "Eliminate consideration of ESG factors by state and local governments when issuing bonds;"
  • "Prohibit state and local governments from using ESG as part of the procurement process;"
  • "Ban the financial sector from considering so called 'Social Credit Scores' in banking and lending practices;" and
  • "Stop financial institutions from discriminating against customers for their religious, political, or social beliefs."

This law is consistent in following other actions Florida has taken to curb ESG investment with Florida's taxpayer funds. Late last year, the SBA divested $2 billion of the state's pension investments from BlackRock. Since then, Florida's chief financial officer, a vocal opponent of ESG, issued a directive banning ESG investing in state deferred compensation plans—impacting $5.1 billion of funds.

The adoption of this law also appears to take aim at the Biden administration's goals of increasing ESG investing. The Department of Labor rule, which became effective in January 2023, clarifies that fiduciaries are permitted to apply ESG strategies in Employee Retirement Income Security Act of 1974 retirement plans. Indeed, the state of Florida is one of 25 states and other interested parties that has initiated a lawsuit against the Department of Labor in the Northern District of Texas, challenging the adoption of the rule in court and seeking an injunctive to prohibit its application.

Florida's new law also comes on the heels of the Biden Administration's Executive Order requiring a "commitment to deliver environmental justice to all."

Some have called laws seeking to prohibit ESG a "liability trap" because they create challenges in defining and enforcing the terms. Others have raised concerns that focusing on ESG has come to be a detriment to fiduciary responsibilities. Regardless of views, institutions investing or even holding Florida funds will need to comply with this new law.

Because under the new law, state and local governments are required to deposit funds into banks designated as "Qualified Public Depository" (QPD). The QPDs will be required to certify compliance that they are not engaged in "unsafe and unsound business practice" by denying or canceling services 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. Banks and other financial institutions will also face administrative sanctions if they are found to be engaged in these practices.

How the law will be enforced and interpreted is still to be seen. But for now, the law and its requirements may raise some new risks for banks and other financial institutions that have directives from other investors and depositors.

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