ESG and Public Pension Investing: Legal Battles and Policy Implications

Legislative Activity in 2023:

In 2023, red states saw a surge in anti-ESG legislation aimed at limiting the consideration of environmental, social, and governance (ESG) factors in pension investments. This increase was driven by the DOL's adoption of an ESG rule and the enactment of pro-ESG legislation in blue states.

2024 Trends and Battleground Shifts:

2024 has witnessed a decline in state ESG legislation. However, the battle has shifted towards legal challenges against anti-ESG laws, as well as ongoing litigation over the DOL's ESG rule.

New York:

In May 2023, participants in the New York City Retirement System sued pension funds for divesting from fossil fuels. A court dismissed the case based on the plaintiffs' lack of standing. The plaintiffs' anti-ESG fiduciary duty theory remains untested.

Oklahoma:

Oklahoma's anti-boycott law, the Oklahoma Energy Discrimination Act of 2022, has been challenged by a former state employee. A judge issued temporary and permanent injunctions, citing the state constitution's requirement that pension funds be managed solely for beneficiaries, not political agendas.

Texas:

In August 2024, the American Sustainable Business Council sued to block Texas' anti-boycott law, SB 13. The complaint argues constitutional violations of free speech, freedom of association, vagueness, and due process.

DOL Rule:

A coalition of state attorneys general filed suit against the DOL's ESG rule in 2023. After a favorable ruling for the DOL, the Fifth Circuit sent the case back for further consideration in light of the Supreme Court's overturning of the Chevron doctrine.

"The DOL's ESG rule, while allowing consideration of ESG factors, is not intended to allow the selection of an investment without regard to its impact on financial performance." - DOL Spokesperson

Conclusion:

The ESG debate has created a growing divergence between federal and state standards for pension investments. Courts will continue to play a critical role in shaping this evolving landscape.

Further Resources:

Navigating State Regulation of ESG Investments: Track ESG-related legislation, executive actions, and coalition activities.

About Our Practice: Learn about Ropes & Gray's expertise in ESG, CSR, and business and human rights compliance.