Readers of this blog are well aware that “ESG” (whatever that term may mean) is one of the hot topics in the financial and business sectors. Companies face scrutiny and pressure to show that they are making progress on ESG goals. The SEC has established an ESG task force and proposed climate change disclosure rules. Now, as if all of that were not enough, political reaction is giving rise to an ESG backlash. As detailed in two recent memos from the Morgan Lewis law firm (here and here), as many as 17 states have now adopted “anti-ESG” state legislation that would limit the ability of state governments, including public retirement plans, to do business with entities “boycotting” industries based on ESG criteria or considering ESG factors in their investment processes.


The actions of the most recent state to adopt anti-ESG legislation – Florida — illustrate the situation. On July 27, 2022, Florida governor (and possible 2024 presidential candidate) Ron DeSantis announced legislative and administrative measures “to protect Floridians from the environmental, social, and corporate governance (ESG) movement which threatens the vitality of the American economy and Americans’ economic freedom by targeting disfavored individuals and industries to advance a woke ideological agenda.”


The governor’s press release quotes him as saying “The leveraging of corporate power to impose an ideological agenda on society represents an alarming trend,” and that “Through the actions I announced today, we are protecting Floridians from woke capital and asserting the authority of our constitutional system over ideological corporate power.”


On August 22, 2022, the Florida State Board of Administration adopted a resolution that restricts the state from including ESG factors in its investment management practices.


The second of the two Morgan Lewis law firm memos links to a chart that summarizes the anti-ESG bills proposed or adopted in 17 states.  The chart breaks the states’ legislation down according to whether it is in the form of a “Boycott Bill” or “No ESG Investment Bill.” Some states (e.g., Texas, Oklahoma, Louisiana) have adopted or proposed both types of legislation.


The Boycott Bills target “financial institutions that “boycott” or “discriminate against” companies in specified industries and prohibits the state from doing business with such institutions and/or from investing the state’s assets (including the state’s pension plan assets) those institutions. For example, some ban government contracts with companies identified by state officials as “discriminating” against certain industries, such as, for example, the fossil fuels industry, or the firearms industry, mining industry, agricultural production industry, or lumber industry. The law firm memo cites the Texas bill that prohibits a Texas state government entity from entering contracts valued at over $100,000 unless the contracting company verifies in writing that it will not discriminate against a firearm entity or firearms trade association.


The No ESG Investment Bills prohibit the use of state funds, including state retirement plans, for the purpose of ESG or social investment – for example, investing in ESG-type investment products. Under this legislation, the state is prohibited form investing in strategies that consider ESG factors for any purpose other than maximized investment returns. The law firm memo cites Kentucky legislation mandating that state government entities must divest from financial companies that boycott energy companies.



The Morgan Lewis law firm’s memos are focused on the implications of the “anti-ESG” legislation for plan fiduciaries. The memos note that the current U.S. Department of Labor approach to the use of ESG factors in plan investment may “contrast to the recent anti-ESG state bills that seem to be aimed at discouraging the use of ESG investing.” The state anti-ESG efforts “could complicate the use of ESG by public retirement plans and create challenges for retirement plan fiduciaries.” The distinction could also “create headaches for investment providers seeking to serve both public retirement plans and ERISA-governed plans.”


While the law firm’s memos focus on the potential implications of the anti-ESG legislation for plan fiduciaries, I have slightly different concerns. I am concerned about the potential implications of the motivations behind the anti-ESG legislation for companies themselves, as well as for their executives.


For some time now, companies have felt pressure from investors, advocacy groups, and industry commentators to show that they are “good” on ESG. The widespread adoption of anti-ESG legislation described above shows the extent to which a backlash against ESG activism is changing the ESG environment. Companies that have been pushing to burnish their ESG credentials could now find themselves caught in the middle of a politically charged firestorm.


It is not a new observation that company’s efforts to establish or validate their ESG credentials could in and of itself lead to claims against the company or its executives. As I have noted on this site, in recent months shareholder claimants have initiated securities class action lawsuits against, for example, Unilever (discussed here) and Wells Fargo (discussed here) based on the companies’ ESG activities. By the same token, the SEC’s ESG task force has filed enforcement actions relating to, for example, a company’s assertions in its Sustainability statement about its mining dam safety (discussed here), or an investment fund’s claims about its “green” investing options (discussed here).


As if it were not enough that companies could face potential claims arising from their ESG initiatives, it now appears that companies trying to burnish their ESG credentials could get drawn into a political minefield.


I think these concerns are worth emphasizing in connection with the current discussion in the D&O insurance industry about the appropriate role of ESG considerations in D&O underwriting. The working assumption in the D&O insurance industry is that underwriters should be trying to figure out if companies are “good” at ESG on a generalized theory that a company’s ability to demonstrate ESG virtue means that the company is a better D&O risk. This theory may be valid but at the same time some other considerations may also need to be considered.


First, as I suggested in the preceding paragraphs, it may be a company’s very ESG initiatives that attracts litigation. And second, a company making high-profile claims about its ESG credentials could get caught in politically complicated circumstances that could mean adverse or at least complicated publicity, disruption of company operations, and even D&O claims.


My point here is that “ESG” is both a complicated and multi-faceted topic. One of my concerns all along about “ESG” as a topic is that the ESG label itself is so broad and encompasses so many issues that it is often difficult to have an intellectually coherent conversation about it; the lack of precision also leads to sloppy thinking as well. Now, with the overlay of the political issues discussed above, I have further concerns that that the ESG risks for companies may be more extensive and more complicated than is generally recognized. The broader range of ESG risks may include claims risks that are far different than is usually assumed in discussions of potential future ESG claims.