State AGs and ESG: Political Whiplash for Policymakers and Investment Managers

After years of financial and investment firms solidifying their Environmental, Social and Governance (ESG) bona fides, the political push-and-pull surrounding “woke” investing seems to be causing a significant withdrawal from these commitments.

Although the ESG retreat has been a moderate-but-noticeable trend over the last several months, it appears to be accelerating under heightened scrutiny of Republican state attorneys general and lawmakers at large. In recent weeks, some of the market’s biggest financial players have backed away from environmental commitments and have cancelled their pacts with the likes of the Climate Action 100+, a global group of asset managers committed to using corporate action to address the climate crisis.

Complicating the calculus for companies attempting to respond to consumer concerns while avoiding political pressure is their fiduciary duty to investors, which drove many firms to avoid climate-related and environmental risks in their investing portfolios in the first place. Many firms are trying to thread this needle by continuing to preach a commitment to sustainability and ESG-adjacent consumer concerns even as they pull away from their formal commitments such as the Climate Action 100+.

The role of state attorneys general in this trend, and their powerful seat at the intersection of policy and subpoena power, can’t be overstated—especially when combined with federal power. In 2022, 19 Republican state AGs signed on to a letter sent to one of the world’s largest asset managers stating that it appeared the firm was foiling the best potential returns on the investments of their states’ citizens and asserting their jurisdictional authority over the matter. A few months later, 17 Democrat state AGs responded with a letter of their own contending that ESG factors are no different than other material concerns that inform risk management, such as supply chain issues or fluctuating interest rates.

Since then, Republicans attorneys general have kept the pressure on by asking fellow Republicans in Congress to hold hearings questioning whether ESG investing meets the fiduciary requirement that U.S. asset managers have to act in the best interests of their clients and raising antitrust concerns. This sustained governmental pressure combined with a shift in focus by the Climate Action 100+ away from disclosure and toward emissions reductions may be causing some firms to fear legal risk more acutely than before.

While Republican state attorneys general take a victory lap, the political divide on this issue will continue leaving companies on a knife-edge for any reaction from Democratic state attorneys general. Moving forward, companies will need to balance potentially competing interests in their risk management strategies, including assessing the cost of threatened litigation versus the likelihood of success on the merits. For example: last May, 26 Republican state attorneys general challenged the Biden administration’s rule permitting retirement plan fiduciaries to consider ESG factors when choosing plan investments. A federal district court judge in Texas, appointed by former President Donald Trump, ruled against the Republican attorneys general and found that the new rule did not violate ERISA or exceed the Department of Labor’s authority. The case is pending appeal in the Fifth Circuit. This lawsuit highlights the need to closely scrutinize the merits of ESG-related challenges and to consult counsel experienced with navigating competing interests stemming from the growing divide in the state attorneys general community.

This document is intended to provide you with general information regarding litigation and political liability issues surrounding ESG. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.