Update on ESG Laws in the Courts

As Oklahoma waits for a state judge to decide whether its anti-ESG (environmental, social and governance) law violates that state’s constitution, a similar challenge to Texas’ laws is moving forward in federal court. Meanwhile, just this week, Missouri’s attorney general has dropped its appeal of a federal ruling that its’ anti-ESG law violates the U.S. Constitution.

In the Lone Star State, the American Sustainable Business Council’s lawsuit says the Texas laws violate the First Amendment by boycotting financial firms based on their political views and violate the 14th Amendment protections of due process.

Texas has blacklisted a number of investment firms from doing business with the state, saying those firms were avoiding oil & gas investments because of concerns over ESG. But several of those companies – if not most – do invest in oil & gas ventures in Texas and elsewhere.

In Oklahoma, Judge Sheila Stinson has already blocked enforcement of their state’s law, saying it violates a state constitutional provision that requires state pensions to keep non-financial considerations out of their decision-making about investments. Lawyers in that case have submitted arguments and are waiting for her to issue a final and permanent order rejecting the law.

Missouri’s laws were challenged by a trade association – the Securities Industry and Financial Markets Association, or SIFMA – stating the rules put unconstitutional restrictions on financial advisers and that the state’s law was preempted by long-standing federal jurisdiction in the space.

“Under today’s federal securities laws, financial professionals are already required to provide investment advice and recommendations that are in their customers’ best interest,” SIFMA President and CEO Kenneth Bentsen Jr. said after the ruling. “That means they cannot put their interests ahead of their customers’ interests when recommending securities. The Missouri rules were thus unnecessary and created confusion.”

At least 20 states have enacted some sort of anti-ESG legislation, often specifying investments in oil & gas and firearms as triggers for blacklisting investment advisers and banks from doing business with their states.

In several of those states – including Texas and Oklahoma – numerous economic studies have measured the negative impacts those laws have on state economies, on investment returns in pensions, and on the increase in borrowing costs to taxpayers as a result from decreased competition among investment firms.

For instance, the Wharton School at the University of Pennsylvania, in a study called “Gas, guns, and governments: Financial costs of anti-ESG policies” said the laws cost Texas taxpayers an extra $300 million to $500 million in interest on bonds through April 2022.

The Texas lawsuit challenging the state’s anti-ESG law is getting support from elected local officials, like Houston City Controller Chris Hollins, who wrote about the issue for the Houston Chronicle:

“As the Houston city controller, I am charged with managing our city’s investments,” he wrote. “I’m the taxpayer watchdog, and I take spending Houston taxpayers’ money very seriously. That’s why, when people who live in an entirely different city pass policies that increase costs for Houstonians, jeopardize workers’ hard-earned retirements and force the city to spend more than what is necessary, it’s a little irritating.”

He’s particularly irked about how the law raises prices for taxpayers.

He continued, “It works like this. When cities and towns want to secure funding to update water pipes, maintain roads or repair bridges, we turn to financial institutions to underwrite our bonds. The more institutions there are to compete for our business, the better the deal.

“But a Texas anti-ESG law prevents us from doing business with financial companies that a handful of politicos — who have little knowledge of what it takes to manage a city’s finances — have deemed hostile to fossil fuels.”

Hollins cautioned state lawmakers — who will start their next regular session in January — that the ESG fight might appear to be partisan, but the consequences affect Republicans and Democrats alike.

“Everyone pays the price of a weaker economy. Lawmakers need to leave investment decisions in the hands of fiduciaries and investment professionals. Money isn’t red, nor is it blue. It’s green.”

It will be worth watching how the courts rule on these various lawsuits.