The battle in the states for freedom to invest responsibly – and how you can help

As President Biden was vetoing a Congressional resolution that attacked our freedom to invest in companies that practice responsible environmental, social, and corporate governance (ESG), a pitched battle has been raging in the states.  

So far this year, 138 bills and four resolutions have been proposed in 33 states that would roll back the ability of fiduciaries to consider ESG factors in investment and contract decisions.  

Responsible investing has come under sustained attack on both the federal and state levels as part of the right-wing culture wars against what they call “woke capitalism.” These bills would force investment managers to disregard important considerations of risk and return, harming state employees and taxpayers alike. Many states have found these bills would cost millions in fees and lower returns. 

While I can’t cover all state bills in one blog post, I can give you a broad outline, tell you how things are going for the anti-ESG campaign – which is facing a lot of pushback – and what you can do to help.  

A guide to anti-ESG bills on the state level 

Four main types of bills are being considered in the states: 

• Bills that target public worker pension programs
• Bills that target state contracting authority 
• Bills that require disclosure or consent for ESG investing 
• Unique bills with no model anywhere else 

Pension bills 

Almost 50 bills in the states target management of state-run retirement funds, requiring financial officers or pension boards to focus solely on “pecuniary factors” in investment decisions.  

• One model bill from the right-wing American Legislative Exchange Council (ALEC) forbids considering ESG factors and “events in the distant future or that are systemic” -- a clear reference to climate change.  
• Another model bill from the Heritage Foundation specifically forbids consideration of greenhouse gas emissions or diversity among corporate boards or employees.  

Some bills list other issues that state pension fund managers are not allowed to consider. For example, an Indiana bill would forbid investing in funds that limit or boycott fossil fuels, firearms, agriculture, timber, and animal products, while a Kansas bill adds refusal to provide abortion access and transgender health services.  

Contract bills 

Almost 40 bills target state contracting authority:  

• Some are based on a 2021 ALEC model bill that prohibits state contracts with financial service companies that boycott fossil fuels.  
• Others are based on a 2022 ALEC model bill that expands the prohibitions to any company (not just financial services) that has any sort of boycott against a long list of favored industries, including fossil fuels, timber, mining, agriculture, firearms, and more.  

These bills often require the comptroller to create a blacklist of companies the state is not allowed to do business with. Many also require the state to divest from such companies -- sometimes with no exceptions even if it increases fees and lowers returns, a direct violation of state fiduciary duty. 

For example, an Iowa bill that has passed the Senate and is now in the House would require a blacklist and divestment from companies that boycott fossil fuels, timber, mining, agriculture, and firearms, with no exceptions for increasing contract costs and lowering investment returns. A similar bill in Kansas adds companies that do not support access to abortion or transgender health care. 

Disclosure bills 

A third type of state bill, modeled on New Hampshire’s Fair Access to Financial Services Act of 2022, pertains to loans or contracts by financial institutions with individuals, organizations, or companies.  

These bills require financial institutions to disclose “subjective criteria” such as ESG scores, diversity, political, or ideological factors, but some ban these criteria entirely. Some bills require financial institutions to disclose these criteria before a contract is signed, while others require it only for customers who are denied services. There are various levels of civil and even criminal liability. 

Unique bills 

Finally, several states are considering their own unique spin on anti-ESG. Texas is the leader here, with proposals that would:  

• Urge Congress to investigate BlackRock CEO Larry Fink 
• Require companies to prove that using ESG criteria is in their best interest 
• Prohibit shareholder proposals that promote disclosure of greenhouse gas emissions.  

States fight back for the freedom to invest 

As these bills make their way through state legislatures, not all has gone smoothly. Where these bills do well is in states whose financial officers are committed to the anti-ESG crusade. For example:  

• Utah – whose state treasurer Marlo Oaks is national policy chair for the anti-ESG State Financial Officers Foundation (SFOF) -- passed four laws and one resolution prohibiting state investments and contracts with firms that boycott favored industries. 
• Idaho – whose treasurer Julie Ellsworth is SFOF’s national policy vice-chair – passed one law with two more close to passage that prohibit state investments and contracts with firms that boycott favored industries.  
• West Virginia – where SFOF member Riley Moore is state treasurer – passed a law limiting consideration of ESG in state pensions over criticisms of the state investment board.  

Yet other states – including some conservative strongholds – have seen surprising pushback, usually tied to the cost of anti-ESG legislation and activism by local bankers, insurers, and retailers.  

Other states 

• Officials with the Arkansas retirement system said the state could lose up to $40 million per year if a bill passes requiring divestment from a blacklist of companies that use ESG metrics. The bill, whose sponsor says he doesn’t believe these findings, is close to final passage. 

• The Nebraska legislature has considered three anti-ESG bills, none of which have moved beyond committee hearings after the opposition from the state’s banking industry. Robert Hallstrom of the Nebraska Bankers Association said one bill would require the state treasurer to dictate a bank’s business and that another could result in significantly lowered returns.  

• In Wyoming, all three anti-ESG bills are dead after considerable pushback from the state treasurer’s office and retirement system. “The bottom line is it would probably cause us to sell just about everything we have other than U.S. Treasury bonds,” chief investment officer Patrick Fleming said. The state could not invest in Peabody Coal because it has an ESG policy, he noted. 

Controversy at ALEC 

As mentioned previously, many of these state bills are based on model legislation from the American Legislative Exchange Council (ALEC), that would require states to stop doing business with companies considered to be boycotting fossil fuels, logging, mining, or agriculture businesses.  

Yet ALEC has not officially endorsed its own model bill. In January, the ALEC board, comprised of 23 Republican state lawmakers, voted to send the bill back to committee after lobbying by the American Bankers Association and state banking associations. “Government should not be dictating business decisions to the private sector, which is what the draft model policy proposed,” the ABA said.  

The fossil fuel industry is pushing back. The Domestic Energy Producers Alliance sent a letter to ALEC board members asking them to adopt the model policy. The measure would “ensure that our state and local taxpayer dollars are not advancing the woke agenda,” the letter said.  

Divesting from ESG turns out to be expensive 

Several studies show that anti-ESG laws result in substantial costs: 

• A Wharton School study found that two 2021 Texas laws banning cities from contracting with banks that have ESG policies cost an extra $303 million to $532 million in higher municipal bond interest rates. 
• A report by Econsult Solutions found that taxpayers in Florida, Kentucky, Louisiana, Missouri, Oklahoma, and West Virgina could owe up to $708 million in additional interest charges on municipal bonds due to anti-ESG laws and proposals.
• A Bloomberg article shows that Texas is paying 19 basis points more than California and Florida is paying 43 basis points – almost half a percentage point – more in interest rates on the bond market because they prohibit contracts with lenders that consider ESG. 

Public opinion supports responsible investing 

Despite the concerted campaign to push anti-ESG bills across dozens of states, multiple polls and focus groups show that public opinion clearly supports responsible investing.  

• A poll by Penn State and ROKK Solutions in fall 2022 found that 63% of respondents – including 70% of Republicans -- say the government should not set limits on ESG investments.  
• In focus groups conducted by JUST Capital in December 2022, participants said companies should be “good corporate citizens” and make a positive impact on society, especially by paying their employees a fair, living wage. They also saw ESG as part of a sound investment strategy.  
• Polling by Climate Power and Data for Progress in March 2023 found that most think financial managers should be able to consider ESG factors in investment decisions, and they support investing public retirement funds in clean energy assets. 

Investors also see ESG as a critical part of their fiduciary duty: 85% of investors are interested in responsible investing, 86% believe companies with sustainability practices may be better long-term investments, and 84% are interested in sustainable investments that can be tailored to their needs, according to US SIF: The Forum for Sustainable and Responsible Investment. 

Even many Republicans, who may not like ESG investing, do not support the war against it. “I think we have to attack [wokeness] in America, but I’m a free market guy,” New Hampshire Governor Chris Sununu said. “If a business wants to be woke, I don’t agree with it — I completely disagree with it. But it’s not up for the government to come in and punish a business or penalize a business.” 

How you can stand up for socially responsible investing 

If you live in one of the states currently considering bills that would limit responsible investing, the most effective thing you can do is contact your state legislator to voice your disapproval.  

• Find your state legislators by inputting your address at openstates.org 
• You may also be able to find your state representatives on your state legislature’s website, which you can find at congress.gov/state-legislature-websites 

States currently considering anti-ESG legislation include Alabama, Arkansas, Arizona, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, and Texas. All bills are dead in Colorado, Mississippi, Virginia, and Wyoming. All bills have either died or been signed into law in West Virginia. All bills have been signed into law in Utah. Reach out to me at cbecker@greenamerica.org if you have any questions. 

You can also support responsible investing by: 

• Checking out our guide on adding socially and environmentally responsible investment options to your employer’s retirement plan. 
• Checking out our 10 steps to breaking up with your megabank and switching to a community development bank or credit union.  
• Checking out how you can use your own investments to create a greener world by engaging in shareholder activism such as voting your proxy ballots. 

My next blog will examine the funding sources for the anti-ESG campaign, but for now understand this is the symptom of once-dominant industries trying to maintain their hold on power and profits – and know their days are numbered. There are more of us, and we will prevail if we stay true to our values. 

Credits 

I am deeply indebted for the material in this blog post to several allies and organizations that have been tracking anti-ESG legislation in the states and beyond. Among them are: 

• Connor Gibson, founder of Grassrootbeer Investigation, who has been painstakingly documenting state legislative hearings. 
• Lara Friedman of the Foundation for Middle East Peace, who has tracked how anti-ESG legislation is a direct descendant of anti-BDS (boycott, divest, sanctions) laws. 
• Frances Sawyer, founder of Pleiades Strategy, whose guide to model anti-ESG legislation provided the basis for this analysis of the different types of state bills.