States across the country have seen a wave of legislative attempts to prevent state governments from contracting with companies that consider environmental, social, and governance (ESG) factors in their investments. These “anti-ESG” bills take various forms, including “boycott bills,” which aim to prohibit state governments from contracting with financial institutions whose ESG metrics would effectively “boycott” any industries that the state’s economy relies on — like fossil fuels. Other anti-ESG legislation seeks to prevent state fund managers, especially for pension funds, from considering ESG factors in their investments.
We invited a panel of experts to explore state-level anti-ESG trends and share how states with proposed or enacted anti-ESG legislation can continue to work toward their climate goals. Panelists* included Connor Gibson, Opposition Research Specialist; Jordan Haedtler, Climate Financial Policy Consultant, and Jessica Church, Advocacy & Political Manager for Take on Wall Street at Americans for Financial Reform.
In this recap article, we’ll provide highlights from our expert panel’s presentations and Q&A, including the state-level legislative strategies being used to promote anti-ESG policy, how states can play both offense and defense to protect their climate goals, and how these trends relate to federal policy implications.
If you are interested in protecting your state’s climate goals from proposed or enacted anti-ESG legislation, are concerned that these policies may soon come to your state, or have stories about your lived experience in regards to this trend, reach out to kristen@climate-xchange.org to get connected with these experts.
Connor Gibson, Opposition Research Specialist
Connor Gibson has years of experience as an opposition research specialist working on climate denial and fossil fuel lobbying. Connor’s work centers around how corporations influence politics, with a particular focus on energy and environmental issues.
The Current Landscape of State-Level Anti-ESG Legislation
In 2023 alone, 165 distinct pieces of anti-ESG legislation across 37 states were introduced, with 14 states successfully enacting bills. In the 23 states where anti-ESG legislation did not succeed this year, a total of 42 bills across 10 states will carry over into 2024; of particular note to keep an eye on are Iowa, Oklahoma, and South Carolina. In the 14 states where anti-ESG legislation did succeed, 22 bills and six resolutions were approved, with another bill that is currently active in Ohio.
Types of Anti-ESG Bills
State Contracts
One of the main areas these anti-ESG bills focus on are state contracts, with 42 bills considered in 23 states this year. Six laws and one resolution were passed in six of those states. The bills that target state pensions often aim to favor important industries in the state — like fossil fuels, guns and ammunition, timber, and nuclear power — by artificially reducing risk assessment and forcing investors to make decisions they otherwise might not, through limiting the criteria they can consider when making decisions about risk in their investments.
The first wave of anti-ESG bills centered around state contracts was in 2021 in states including Texas, North Dakota, and Oklahoma. The “Energy Discrimination Elimination Act” (EDEA) was a model bill proposed by members of the American Legislative Exchange Council (ALEC) in December of 2021. Five states passed a version of the EDEA in 2021 and 2022, but the bill has since become disfavored and has not seen success in 2023.
Another version of this type of anti-ESG legislation that focuses on state contracts is the “Eliminate Economic Boycotts Act”, which is similar in nature to the EDEA but includes more industries outside of fossil fuels. At the core of this legislation is the idea that companies using ESG factors in their investments should not be contracting with the state governments to manage their assets. In 2023, five of these bills have been considered in four states.
The last version of this type of bill regarding state contracts is modeled after the “Protecting Free Enterprise and Investments Act,” which also targets pensions. This legislation is unique, as it sometimes incorporates antitrust law as an enforcement mechanism against the private sector and threatens to revoke the professional licenses of individual investment advisors if they violate the terms of the bill. In 2023, three bills and one resolution were considered in four states, and Utah is the only state so far that has passed a bill with similar language.
Retiree Pensions
The biggest subset of bills in 2023 target pensions, with 59 bills considered in 30 states this year. Eleven of these laws and one resolution were passed in 10 states. Pensions represent trillions of dollars in assets, and this legislation threatens to remove pensions from the management of companies that utilize ESG factors. This year, there were seven laws proposed in six states that specifically utilize language similar to this, using the “State Government Employee Retirement Protection Act” model. Four laws in four states were passed with a slightly different model version known as the “State Pension Fiduciary Duty Act,” which aims to eliminate risk assessment that disfavors fossil fuels as a factor in fiduciary commitment. For state pensions, it is essential to consider long-term risks related to fossil fuels — like climate change — as pension funds are centered on long-term investments in particular.
Disclosure and Liability Threat
The least popular bill in this trend is based on the model “Fair Access to Financial Services Act,” which proposes that by not disclosing the use of ESG investment to clients, companies have a liability and potential cost of action in civil or even criminal court. Twenty-five bills were considered in 18 states, none of which passed. This bill failed in Missouri, but much of its language was subsequently enacted through executive power by the Secretary of State.
ESG Scores and Opposing Federal Rules
There were also other bills that attempted to leverage state government contracting to disincentivize companies from using ESG criteria for procurement. In 2023, there were 23 bills considered in 13 states that aimed to disqualify companies from a state contract if they utilize ESG “scores,” with five laws that passed in five states. The other major bucket of bills aims to oppose federal rules related to disclosure of climate risk, with 10 bills considered in eight states, none of which were successful, although three non-binding resolutions did pass.
Opponents and Proponents of Anti-ESG Legislation
Legislation Opponents
There are a wide variety of opponents to this trend, spanning across sectors:
- Private sector — state banking associations, state chambers of commerce, and insurance lobbyists
- Government — investment and financial officers, pension fund leadership
- Labor — American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), Service Employees International Union (SEIU), American Federation of Teachers (AFT), National Education Association (NEA)
- Climate advocates — Sierra Club, Climate Cabinet, Ceres
- Libertarians and free marketeers — Cato Institute, R Street Institute, National Taxpayers Union, Arizona Republican Liberty Caucus
Legislation Proponents
The groups supporting these bills in legislative hearings include the Texas Public Policy Foundation, The Heartland Institute, Heritage Action for America, the Opportunity Solutions Project, the Foundation for Government Accountability, and the National Shooting Sports Foundation. In addition, ALEC, the State Financial Officers Foundation (SFOF), and the Republican Attorneys General Association (RAGA) are key players behind the scenes of this legislative effort.
For more information on 2023 state-level anti-ESG trends, explore Pleiades Strategy’s state legislative tracker and recently released report, co-authored by Connor Gibson.
Jordan Haedtler, Climate Financial Policy Consultant
Jordan Haedtler is a climate financial policy consultant with experience as a legislative aide at both the federal and state level. Haedtler is currently a consultant with the Sunrise Project, and is working to advance climate financial policies within the context of state government, including those related to commitment that state budgets, pension funds, displaced fossil fuel workers, and insurance policyholders have to the risks of climate change.
The Origins of the Anti-ESG Movement: What are the Risks of Climate Change?
The recent state-level anti-ESG trend is largely related to the Biden administration’s attempts to take action to protect the federal financial system from threats posed by the climate crisis. Financial regulators who identify climate change as a threat to financial stability do so because of (1) physical risks, such as damages from floods, wildfires, and drought, which impose costs on state budgets and other financial actors; and (2) transition risks, such as the losses accrued in utilities and energy costs resulting from the transition to a clean energy economy, mostly within the fossil fuel sector. The current administration’s climate risk supervision framework includes rules, guidance, and ESG standards from the Department of Labor, the Federal Reserve and other banking agencies, the Federal Insurance Office, and the Securities Exchange Commission (SEC), which has provoked major backlash from the fossil fuel industry and associated organizations. How Have States Protected their Climate Goals from Anti-ESG Legislation?
In a handful of climate-friendly legislatures, there has been some movement to protect states from this anti-ESG legislation. There are not many documented cases of success, with the exception of bills that require climate risk assessments of state investment portfolios in Maryland and Colorado. Other successes include policies related to the disclosure of sustainability factors in Illinois, climate risk pension bills introduced in Massachusetts and Washington, and fossil fuel divestment bills introduced in California and enacted in Maine.
Policy Considerations When Shaping State Climate Risk Legislation
There are a few main points of consideration for legislation aimed at protecting a state from climate financial risk. The first is an active debate in the climate community: is it a better tactic to go on proactive offense to protect against potential anti-ESG legislation, or to defend after anti-ESG policies have been passed? A main issue here is the retrenchment we’ve seen from corporations and financial institutions over the last couple years of anti-ESG escalation, where many have stepped back from their net-zero climate goals. One approach, neither fully “offense” or “defense,” is to adopt policies that ensure that asset managers continue to use ESG factors in their risk analyses, such as Illinois’s recently passed HB 2782, which amends the state’s Sustainable Investing Act (2019) to require that certain private financial institutions contracted by Illinois continue using sustainability factors in pension fund decisions.
Another debate is whether to actively use the state’s investment portfolio as a voice to engage contracted corporations, or to divest completely from such corporations — the latter of which has been a priority for many climate advocates over the past decade. To date, Maine is the only state that has enacted legislation (LD 99, 2021) requiring divestment of the state’s assets in the fossil fuel industry — in Maine’s case, by 2026, with a major loophole that it can be ignored if it is found to be in conflict with the overall fiduciary duty of Maine’s pension fund managers. Similar language can be found in California’s trio of climate finance bills, which passed the Senate and are pending in the State Assembly.
The last debate is around how to use the state’s proxy voting power on Wall Street, wherein every spring, corporations’ shareholders vote on proposals such as those related to meeting climate targets, moving aggressively to reduce fossil fuel pollution, and even replacing board directors who have been obstacles to climate progress. Colorado’s recently passed SB 16 requires the state to conduct a climate risk assessment of its investment portfolio, the second state to do so after Maryland in 2022. The original version of Colorado’s bill required the state’s pension system to align its proxy voting targets with its 1.5°C target, but this provision was ultimately stripped from the bill.
For more information on policy proposals related to protecting state pension funds from climate risk, read the Roosevelt Institute’s recently released brief, co-authored by Jordan Haedtler.
Anti-ESG Movement in Insurance Policy
Insurance has increasingly been part of the debate around anti-ESG investing. As insurance is entirely regulated at the state level, state insurance legislation is extremely important, so keep an eye out in this arena.
A few weeks ago, Texas passed SB 833, prohibiting the state’s insurers from using ESG factors in their risk analysis. On the federal side, the Federal Insurance Office (FIO) recently issued a report with recommendations around climate risk and insurance.
Jessica Church, Americans for Financial Reform
Jessica Church is the Advocacy and Political Manager for Take on Wall Street at Americans for Financial Reform, where she leads and mobilizes coalition members to advance progressive economic priorities, especially overhauling corporate governance policy to incentivize corporate decision making that is aligned with the interests of workers, communities, and the planet.
Threats to the Federal ESG Regulatory Agenda
There is a lot of movement at the federal level around ESG — in fact, President Biden’s first veto earlier this year was issued on a congressional resolution that would have overturned a rule allowing investment decision makers to consider ESG factors. Congress did not have two-thirds support to override that veto, but advocates are concerned about similar responses to future rulemaking, especially around human capital management disclosures. In addition, the House of Representatives held two hearings in May and June of this year related to ESG, with more scheduled in July. Kentucky Representative Barr has even dubbed it “ESG month.”
Congress has introduced quite a few bills around ESG, including the Ensuring Sound Guidance Act, the Investor Democracy is Expected (INDEX) Act, the Putting Investors First Act, the Mandatory Materiality Requirement Act, the Protect Farmers from the SEC Act, the Scope 3 Act, the Stop TSP ESG Act, and the No ESG at TSP Act. Over the weekend, House Financial Services majority members dropped 18 more bills centered around similar issues, furthering that this is a major focus of upcoming federal legislative action.
How Do Voters Feel About ESG?
Voters, for the most part, are against anti-ESG policy. Sixty-three percent of voters agree that the government should not set limits on corporate ESG investments, including 60 percent of Republicans and 57 percent of Democrats. Further, 76 percent of voters agree that companies should be held accountable to make a positive impact on communities in which they operate, including 69 percent of Republicans and 82 percent of Democrats — percentages this high are very rare in the polls.
While ESG is a topic that not many voters may be aware of, protecting Americans from these private interests encroaching on worker power, climate justice, and racial equity should be central in state and federal policy conversations.
Q&A
Q: Who are the partners essential to building a strong coalition to protect states’ climate goals from anti-ESG policies?
Jordan Haedtler: It’s a very broad coalition that can be mobilized, as the report mentions. Even in some pretty tough terrain, like Missouri and Iowa, states have struggled and not passed anti-ESG legislation in part because there has been opposition not only from climate, labor, gun safety, and democracy reform organizations, but also from bankers associations, free market advocates, Chambers of Commerce, and insurance trades. I would encourage folks to think broadly, think about reaching out to organizations and stakeholders that you may not normally reach out to on climate issues. And get in touch with us, because we’re managing these coalitions all the time. I would also say, put workers’ voices at the forefront whenever possible, it’s been very effective to have workers speaking to the effect of, ‘keep your culture wars out of my earned benefits,’ which has been a really powerful message that some labor representatives have said in hearing testimony.
Conclusion
States can use ESG factors to ensure that their long-term investments take into consideration the long-term risks from climate change. They also wield a great deal of financial power through contracts and investing, which can be used to accelerate climate progress. As anti-ESG bills are gaining traction across the country, it’s vital that state lawmakers are prepared to fight back.
The recent trend of anti-ESG legislation jeopardizes the security of state contracts and retiree pensions, as climate change poses a real risk to long-term financial investments. Whether your state has introduced or passed an anti-ESG policy, or if you are concerned that it may happen soon, you can still take action to protect your financial futures. Reach out to our experts and build a broad coalition not only of climate advocates but also labor unions, chambers of commerce, pension fund leadership, and more — if we stay connected as a national network of advocates, we can help ensure that we stay on track for our state’s climate targets.
* The views and opinions expressed by our guest speakers during the webinar and summarized in this article are their own and do not necessarily reflect the views or positions of Climate XChange.
