BLOG BY: GARRISON ROSSER
Polarizing political views concerning environmental, social, and governance (ESG) factors are sweeping across the United States.[i] Throughout 2021 and 2022, eighteen states passed laws that place limitations on ESG investing or prohibit their state governments from doing business with organizations that adopt ESG policies.[ii] While conservatives argue that financial institutions should not invest in “woke capitalism”,[iii] liberals continue to defend the historically routine practice of considering how businesses affect the environment and society.[iv] In Kentucky, Governor Beshear recently signed House Bill 236 that prohibits fiduciaries from considering an “environmental, social, political, or ideological interest which does not have a direct and material connection to the financial risk or financial return of the investment.”[v]
Similarly, a battle at the federal level is taking place.[vi] In response to the Senate’s vote to overturn a U.S. Department of Labor rule that allows fiduciary retirement fund managers to consider climate change, good corporate governance, and other factors when making investments,[vii] President Biden used his first veto to preserve the loosened restrictions around ESG funds for 401(k) plans.[viii] During the previous administration, fiduciaries were required to “select investments… based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment.”[ix] Under the new rule, fiduciaries can base investments on factors they deem relevant, including “economic effects of climate change and other ESG considerations.”[x]
Despite this political tension, interest in ESG investing is rising.[xi] Although largely driven by Europe, Global ESG fund assets reached approximately $2.5 trillion in 2022, a twelve percent increase from 2021.[xii] The younger generation is leading this movement; a recent study by Stanford University found that more than two-thirds of millennial and Gen Z investors were very concerned about environmental issues and were willing to lose up to ten percent of their investments to see companies improve their environmental practices.[xiii] Importantly, however, ESG considerations do not correlate with lost profits.[xiv] In fact, shares of corporations with sound ESG practices tend to be less volatile, have higher three-year returns, and are less likely to declare bankruptcy.[xv]
Quite clearly, ESG investing is here to stay. With varying political preferences and no single standard for ESG programming, assessment, or reporting, organizations face a rapidly evolving landscape of competing principles.[xvi] Lawyers should capitalize on this opportunity by embracing ESG practices—and they are. Nearly half of law firms across the U.S. and Europe reported that they created an ESG practice area in the past three years.[xvii] To accommodate the clients’ wishes, lawyers today must be able to spot ESG issues and respond effectively.[xviii] As ESG reporting continues to increase in response to shareholder demands, lawyers also must be prepared to defend against legal challenges to corporate ESG disclosures.[xix] Lawyers can help assess and manage these risks by proactively suggesting risk-reducing changes to ESG investment planning and implementing procedures to ensure clients are adequately insured for litigation risks.[xx] Significantly, ESG offers an opportunity for lawyers to not only advise clients to abide by the law, but also to leave the world in a better condition.
[i] Jessica Guynn, DeSantis and GOP are waging war against “woke” ESG. Now business groups are fighting back., USA Today (Mar. 9, 2023, 5:50 PM), https://www.usatoday.com/story/money/2023/03/09/woke-esg-desantis-republicans-backlash/11438254002/ [https://perma.cc/UTT5-BYPR].
[ii] Bruno Bischoff, Anti-ESG Legislation in the U.S.: Emerging risk for financial institutions?, ECOFACT (Dec. 13, 2022), https://www.ecofact.com/blog/anti-esg-legislation-in-the-usa-emerging-risk-for-financial-institutions/ [https://perma.cc/3KMT-WRFX].
[iii] Anthony Tellez, What is ESG Investing—And Why Republicans Are Trying to Ban It from Retirement Funds, Forbes (Feb. 28, 2023, 12:29 PM), https://www.forbes.com/sites/anthonytellez/2023/02/28/what-is-esg-investing-and-why-republicans-are-trying-to-ban-it-from-retirement-funds/?sh=294d819174e1 [https://perma.cc/37LJ-QGMT].
[iv] Guynn, supra note i.
[v] H.B. 236, 2023 Leg. Reg. Sess. (Ky. 2023).
[vi] See 29 C.F.R. § 2550 (2023).
[vii] See id.
[viii] Greg Iacurci, Biden used first veto to save a 401(k) investment rule. Here’s what it does, CNBC (Mar. 21, 2023, 3:57 PM), https://www.cnbc.com/2023/03/21/biden-veto-401k-rule-esg-investment-funds.html [https://perma.cc/LV5L-GS9V].
[ix] See 29 C.F.R. §§ 2509, 2550 (2021).
[x] See 29 C.F.R. § 2550 (2023).
[xi] Brian Baker, ESG Inv. Stat. 2023, Bankrate (Jan. 31, 2023), https://www.bankrate.com/investing/esg-investing-statistics/#stats [https://perma.cc/38YG-RMD3].
[xii] Id.
[xiii] Alexander Gelfand, The ESG Generation Gap: Millennials and Boomers Split on Their Inv. Goals, Stan. Graduate Sch. of Bus. (Nov. 10, 2022), https://www.gsb.stanford.edu/insights/esg-generation-gap-millennials-boomers-split-their-investing-goals [https://perma.cc/LC83-CGEZ].
[xiv] Baker, supra note xi.
[xv] Id.
[xvi] Jillian C. Kirn & Bernadette M. Rappold, Considering ESG? Three Ways Lawyers Can Help, Bloomberg L. (Jan. 27, 2021, 4:00 AM), https://news.bloomberglaw.com/esg/considering-esg-three-ways-lawyers-can-help [https://perma.cc/758C-VTDP].
[xvii] Law Firms in the ESG Game, Harv. L. Sch. (Feb 2023), https://clp.law.harvard.edu/knowledge-hub/magazine/issues/esg-and-lawyers/law-firms-in-the-esg-game/ [https://perma.cc/XZC5-7UTL].
[xviii] Id.
[xix] Kirn & Rappold, supra note xvi.
[xx] Id.