ESG in 2024 – and in the year ahead
After a surge in anti-ESG (environmental, social, and governance) legislation occurred in 2023, an overview from the Ropes and Gray law firm showed a drop-off in lawmaking in 2024, and an increase in litigation over the issue.
“This decline [in legislation] might come as a surprise, given that the initiatives motivating last year’s wave of activity have not abated –but a closer look reveals that the battleground has arguably shifted from the statehouse to the courtroom as more of these laws have been challenged for their enforceability,” their year-end report states.
They point to a case currently pending in a Texas federal court, where more than two dozen state attorneys general are suing to block a Department of Labor rule allowing fiduciaries of some retirement plans to consider ESG factors in investment selection.
New York City’s decision to divest in fossil fuel investments survived a challenge on technical grounds in July 2024, without addressing whether that decision violated fiduciary standards. That remains untested.
In Oklahoma, state courts struck the state’s anti-ESG law, the Oklahoma Energy Discrimination Act of 2022, which prohibited state retirement plans from hiring investment advisors who avoided energy investments. That decision –that the law violates a state constitutional provision requiring pensions to work for the “exclusive benefit” of beneficiaries – is being appealed by the state.
A similar state lawsuit in Texas challenges that state’s legislation requiring the comptroller to maintain a blacklist of companies that include ESG factors in their investment decisions.
Separately, Texas’ Attorney General is leading a group of state attorneys general in litigation against three large investment advisors –BlackRock, State Street, and Vanguard –that makes a novel argument that accuses them of using their client’s money to invest in coal companies, then cutting production and benefitting from higher prices that resulted as supplies of coal fell. Oddly, the suit alleges the firms didn’t do it for the money, but because they believe “that concern for the climate confers a license to suppress competition.”
Ropes & Gray is also maintaining a map of state legislation on ESG, tracking the patchwork regulations over investments across the U.S.
That doesn’t mean legislation on ESG came to a standstill outside the courts in 2024. Late last year Ohio Governor Mike DeWine (R) signed into law a bill requiring state pension funds and university endowments to “make investment decisions with the sole purpose of maximizing the return on its investments.” It goes further, saying those boards “shall not adopt a policy, or take any action to promote a policy, under which the board makes investment decisions with the primary purpose of influencing any social or environmental policy or attempting to influence the governance of any corporation.”
On the other side of the aisle, San Francisco’s City & County Employees’ Retirement System went the other way, adding oil & gas and thermal coal companies to its list of restricted investments in December.
What about 2025?
The Harvard Law School Forum on Corporate Governance unfortunately sees more conflict ahead. “After a much-anticipated election cycle in the U.S., Republicans will take over the White House and control both chambers of Congress. This shift in power will significantly impact ESG initiatives…” they wrote in a December report. “One thing is certain: staunch ESG proponents and opponents will continue to clash, placing companies squarely in the middle of the ongoing debate.”
They have a list of what they call “the most likely scenarios,” which includes:
- Rollback of the SEC’s ESG agenda
- Revisited attacks on proxy advisory firms and ESG shareholder proposals.
- Increased pressure on companies from pro-ESG coalitions.
- A fragmented ESG disclosure landscape.
- State lawmakers taking on a bigger ESG role.
We have already seen two states take quick action with the start of 2025. In Wyoming, House Bill 80 would prohibit investment accused of considering ESG factors from investing state funds. If passed, the Wyoming Retirement System estimates it would reduce revenue for the pension by nearly $1.2 billion over three years. During a committee meeting on the bill, State Treasurer Curt Meier (R) said, “Every one of our managers are going to say that there is a material change in our contracts and they’re going to walk out the door. And we’re going to be left with nobody to invest and no markets to invest in.” An amendment was quickly filed but concerns still remain given the significant cost to the state’s taxpayers and retirees alike. .
In Iowa, Attorney General Brenna Bird introduced legislation that would ban fiduciaries managing the state’s pension plans from considering ESG factors. This is not the state’s first attempt at enacting anti-ESG legislation. Similar bills in 2024 failed to become law.
The Harvard Law School Forum on Corporate Governance closed this advice: “It is crucial to analyze the potential consequences of any changes to ESG disclosure, taking into account institutional investor pressure and the incoming Republican-led White House and Congress.”
In short: New Year, but the same ESG debate is likely to continue…