Anti-ESG laws are faring poorly in the courts

State legislators and regulators eager to steer investment advisers’ decisions involving environmental, social, and governance (ESG) factors in pensions and public finance are finding stiff resistance in state and federal courts.

A state judge in Oklahoma is considering a final judgment against that state’s anti-ESG laws, having already put them on hold after finding those laws violate the state constitution. And in a ruling that could have repercussions in other states, a federal judge struck down Missouri’s restrictions, saying they conflict with federal preemption in areas dealing with investment laws and the U.S. Constitution.

In Oklahoma, the former state employee who challenged the 2022 anti-ESG law is asking the courts for a summary judgment; Earlier this summer, a state judge issued a permanent injunction blocking enforcement of the law. At the same time, Oklahoma’s attorney general is working to appeal the injunction and wants the court to hold hearings before a final judgment is issued.

That judge ruled the Oklahoma constitution trumped a law that sought to block banks and investment advisors allegedly boycotting energy companies from doing business with the state.

“The Court finds a substantial likelihood that this stated purpose of countering a “political agenda” is contrary to the retirement system’s constitutionally stated purpose,” the judge ruled. “An attempt by the Treasurer or the Board to divest or transfer funds for any purpose other than the benefit of the members or beneficiaries is contrary to and a violation of Okla. Const. Art. 23, §12.”

More recently, Missouri’s anti-ESG rules were heard in federal court. The state’s Attorney General unsuccessfully defended two regulations that required advisers and brokers to file reports and get written consent from clients when recommending investments with a “social or other nonfinancial objective.”

The lawsuit challenging those rules, filed a year ago by the Securities Industry and Financial Markets Association (SIFMA), argued that federal law already requires advisers to act in their clients’ best interests.

“Under federal law, firms cannot place their interests ahead of their customers’ interests for any reason — be it ‘social,’ ‘nonfinancial,’ or otherwise,” they wrote.

SIFMA also argued the regulations violated First Amendment rights: “Specifically, the Rules require financial professionals to describe common investment strategies, and many federal covered securities, as ‘not solely focused on maximizing a financial return for me or my account’ even in situations where the financial professional does not believe that statement to be accurate.”

The court ruled Missouri’s regulations are preempted by federal laws, violate the First Amendment to the U.S. Constitution, and are “unconstitutionally vague” because they don’t define “nonfinancial objective” or “maximization of financial return.”

The judge issued a permanent injunction, and the state is deciding whether to appeal that ruling. But as it stands today, that ruling from the federal judge is likely to have ramifications for other similar state laws.

We’ll continue to watch to see if the courts continue to set the record straight on the legality of anti-ESG laws.