Republican lawmakers in several statehouses are pushing to limit access to state contracts and pension funds for businesses with ESG investments and policies, forcing many firms to navigate a changing regulatory landscape./quality/90/?url=http://bloomberg-bna-brightspot.s3.amazonaws.com/e1/fb/176594604e30a6478e8b64c4ef44/364250638.jpg” title=”State Lawmakers Push Texas-Style Business Penalties Against ESG” />
Republican lawmakers in several statehouses are pushing to limit access to state contracts and pension funds for businesses with ESG investments and policies, forcing many firms to navigate a changing regulatory landscape.
Bills proposed in roughly a dozen states this year would penalize companies for considering environmental, social, and governance factors–such as climate change or diversity issues–over financial returns. The activity adds to growing backlash against companies with ESG investment policies from doing business in states such as Texas and Florida, where GOP officials have launched high-profile battles against BlackRock Inc. and other asset managers. There are also anti-ESG proposals by Republicans in the US House.
“It’s definitely come to a crescendo lately,” said Lance Dial, a partner at Morgan, Lewis & Bockius LLP, whose clients include asset managers, mutual fund managers, and pension fund managers.
The state proposals are part of a larger political debate over ESG that includes disagreement over its overall definition and whether such factors align with a company’s fiduciary duties. Firms have been whipsawed between shareholders who have pressed them to be better corporate citizens and state officials who could penalize them for following through with ESG commitments, said Kahlil Williams, a partner at Ballard Spahr and co-leader of the firm’s ESG Working Group.
“There are more risks and costs with actually doing what you say you’re going to do,” Williams said.
The actions come as Texas and more than 20 other states on last week sued the Biden Administration to halt a Department of Labor rule they allege prioritizes ESG concepts into ERISA regulations.
Conversely, Democratic legislators in states such as New York and Massachusettsare countering GOP proposals with bills to require new ESG considerations for public pension funds, potentially adding to an increasingly complicated patchwork of rules for firms to navigate.
Boycott Bills
State legislative proposals vary in their approaches to limiting ESG considerations, but most fall into a few categories, Dial said. Bills pending in Arkansas, Oklahoma, Wyoming, and other states would only allow state government contracts for companies that certify they don’t boycott or discriminate against certain industries, such as oil and gas or firearms.
Lawmakers in states including Mississippi and South Carolina have authored bills that would prohibit public pension investment decisions based on any factor other than maximizing returns. Legislation in Missouri would ban states from discriminating against or favoring potential vendors or contractors based on ESG factors, including environmental policies and employee wages.
Many of the boycott and pension bills reflect model legislation pushed by conservative-backed groups including Heritage Action for America and the American Legislative Exchange Council. Heritage Action’s state legislative campaign argues ESG hurts specific industries for politically motivated reasons.
ALEC’s model pension bill would remove politics from pension investment decisions to better protect financial returns for retirees, said Jonathan Williams, the council’s chief economist and executive vice president of policy. It’s too early to tell which state legislatures will ultimately pass laws this year to address the “weaponization” of ESG, but most center-right states will try, he said.
“There’s a lot of interest in this concept,” Williams said.
Disclosures Needed
To be sure, the bills will face pushback in statehouses. North Dakota Rep. Anna Novak (R) introduced a bill (H.B. 1429) that would require state contractors to confirm they don’t boycott energy or production agriculture. Novak told a legislative committee that state money should not go to companies “that want to see the demise of our critical state sectors.”
The proposal would complicate contract negotiations and increase legal costs, Sherry Neas, representing the state Office of Management and Budget, told lawmakers. She questioned if the measure would achieve its intended result and asked whether businesses would be willing to agree to the written verification required under the bill.
“A lot would be hesitant to sign this vague provision,” Neas said.
‘Middle Ground’
The use of ESG factors solely for financial reasons instead of a mission-related goal is one approach companies can consider if they’re trying to work across states, Dial said. The state boycott bills, for example, allow companies to limit work with certain industries if there’s a business purpose, such as a bank trying to limit its lending risks.
“You can find that middle ground,” Dial said, noting there’s a business tradeoff because some investors are seeking “ethical” ESG products that go beyond financial considerations.
Most pending legislation would generally leave state officials to decide what counts as a boycott or other violation, adding more complexity to the debate.
“These are judgment calls,” Dial said.
Companies navigating regulatory and reputational risks need to consider what’s important to their business and shareholders because ESG considerations vary depending on the circumstances, Williams with Morgan Lewis said. They also should solidify their own definitions of ESG, make clear disclosures about their business products, and consider how to manage any impacts that follow, Dial said.
“You should let the truth drive what these disclosures are,” he said.