The Relevance and Materiality of ESG Investment Rules Across The US

ESG investing has gained significant attention from investors in recent times and has also come under the scrutiny of regulators worldwide. In the United States, the industry awaits a final ESG disclosure rule from the US Securities and Exchange Commission, and the US Department of Labor has recently eased restrictions on considering certain ESG factors in retirement plan investment decisions. At the state level, ESG investing remains a contentious issue, with various states debating the relevance and impact of ESG factors and issuing differing regulations, with some even threatening to use their enforcement authority to advocate for one side or the other of the debate.

As of mid-July 2023, 20 states have implemented “anti-ESG” rules that seek to limit or discourage the consideration of ESG-related factors in investments, while eight states have “pro-ESG” rules that aim to protect and incentivize ESG-related investments. Additionally, more than 75 anti- or pro-ESG bills are currently pending in state legislative sessions across the US, indicating widespread interest in this issue.

These state-level ESG rules can be broadly categorized into five types:

  1. No Boycott Legislation: Directs state entities to divest from and avoid contracting with companies that boycott certain industries, such as fossil fuels or firearms.
  2. Prohibition on ESG Discrimination: Prevents state entities from contracting with companies that are deemed to be “discriminating” against certain industries, including firearms or fossil fuels, based on ESG factors.
  3. Prohibition on ESG Consideration: Forbids the consideration of ESG factors or the pursuit of ESG-related goals when making state-sponsored investments.
  4. ESG Consideration Requirement: Requires the consideration of ESG factors in investment decision-making, with some laws specifically targeting public employee retirement fund managers.
  5. ESG-Based Investment Prohibition: Prohibits investment managers of public funds from investing in industries deemed harmful to ESG-related efforts.

The intricate web of conflicting and dynamic ESG investing regulations can pose challenges for investment providers, especially when serving different state investment funds. Assistance can be offered to clients by maintaining a detailed chart with a proprietary analysis of each state’s ESG-related legislative efforts, which is regularly updated and shared with subscribers. This service helps clients navigate the rapidly evolving legal environment surrounding ESG investing.