Legal developments ‘undermine’ footing of US anti-ESG efforts

Texas court judgement and Missouri filings provide useful precedents for firms dealing with the backlash, says Ropes & Gray partner.

Recent decisions by a Texas judge and admissions by Missouri state officials in a lawsuit defence “undermine the premise” of anti-ESG actions by Republican officials, according to a partner at law firm Ropes & Gray in Boston.

Speaking to Responsible Investor, Amy Roy said that the two events provided asset managers targeted by Republican officials with “helpful support” to point to in litigation and when responding to investigative demands.

Amy Roy
Amy Roy

In September, a Texas district judge upheld the Biden administration’s rules on allowing US workplace pension schemes to consider ESG factors when selecting investments after it was challenged by 26 Republican attorneys general and a series of private plaintiffs.

The ruling was followed by an admission in early October by the state of Missouri that ESG factors can be considered in pursuit of financial returns.

Challenged in court by industry group SIFMA over a rule requiring disclosures of social or other non-financial objectives when advisers or broker-dealers sign up clients, the state acknowledged that a safe harbour existed and no disclosure was required when the firm considers non-financial criteria for financial returns.

The Missouri concession, Roy said, “frankly undermines the broader premise that the Republican state officials have been heavily relying on”. It is, she continued, “an express concession by these Republican state officials that ESG factors can and are often, in fact, used for financial purpose”.

While not a novel realisation for the asset management industry, she said, the express recognition by a very active anti-ESG state was interesting.

Similarly, the Texas judgement came as something of a surprise to observers given that the judge picked for the case is seen “a well-known conservative”.

“It was no surprise that these Republican attorneys general decided to file suit in Texas and in this specific court,” she said. “It was surprising to see such a conservative judge expressly embrace the notion that ESG factors can be considered for risk-return purposes and in appropriate circumstances.”

She noted that, while the decision was based on a question of objective law, the judge “frankly didn’t even need to go that far in opining the way he did”.

Given the increasing demands on asset managers to certify that they are not boycotting certain sectors or provide various disclosures on ESG considerations, as well as investigative demands from Republican officials, Roy said the events in Missouri and Texas could be a “useful inflection point”.

It could allow investors to be more comfortable when certifying they are considering only pecuniary returns even when incorporating ESG factors into their decisions, she added.

While the legal battles over ESG are heating up, with industry associations, individuals and state officials filing suits, Roy said it was unlikely that individual managers would get involved as they would be reluctant to put a target on their back.

Antitrust investigations

With regard to antitrust investigations by Republican attorneys general, Roy said: “I just don’t see that theory playing out.”

While Roy is in Ropes & Gray’s securities litigation group and is not an antitrust lawyer, she said that current accusations are “not your typical antitrust scenario where competitors are caught colluding together to keep another competitor out”.

“I think that there are some material and fundamental flaws with the theory and that may have something to do with why we haven’t seen any actual litigation by these officials yet.”

She speculated that the attorneys general could just be looking to achieve a chilling effect by making intrusive demands and “seeing if that has any effect of killing conduct that they claim not to like”.

While many eyes are on the results of congressional and presidential elections next year, and the risk of intervention against ESG on the federal level, Roy said the main focus should be on the states, particularly electorally.

She pointed to the results of the election for the Arizona state attorney general, where Democrat Kris Mayes took the seat from the Republicans and promptly exited an early investigation into ESG practices.