Planet Earth

Many readers may have seen that earlier this week, President Biden made his first use of his Presidential veto powers to block a Congressional measure that would have reinstated Trump-era Labor Department ban on retirement plans considering factors such as climate change, social impacts or pending lawsuits when making investment choices. However, readers may not have seen that last week, in apparent anticipation of the Presidential veto, a group of governors of 19 states announced that they had formed an alliance, led by Florida Governor Ron DeSantis, to “push back against President Biden’s environmental, social, and corporate governance agenda that is destabilizing the American economy and the global financial system.”

The 19 state governors issued a joint statement that further explained their reasoning for forming the alliance. The March 16, 2023, press release from Governor DeSantis’s office about the alliance can be found here. The March 16, 2023, joint statement of the governors can be found here. A March 21, 2023 memo from the Cadwalader law firm about the governors’ alliance can be found here. The details of the Department of Labor guidelines, the Congressional measure, and President Biden’s veto are discussed in a March 20, 2023 post on The Nickel Blog, here.

In their March 16 statement, the governors state that they are coming together, in anticipation of President Biden’s veto, because, the statement says, President Biden is putting “his political agenda above the wellbeing and individual freedoms of hardworking Americans.” The governors are acting collectively because they recognize that “we as freedom loving states can work together and leverage our state pension funds to force change in how major asset managers invest the money of hardworking Americans, ensuring corporations are focused on maximizing shareholder value, rather than the proliferation of woke ideology.”

With respect to the Congressional measure that the statement anticipates President Biden will veto, the statements says that Congress had taken “action to keep politics out of American’s retirement funds,” and that President Biden’s veto “puts the pensions of thousands of hardworking Americans at risk to the radical environmental, social, and corporate governance movement (ESG) rather than prioritizing investment decisions on the highest rate of return.”

The statement goes on to say that “the proliferation of ESG throughout America is a direct threat to the American economy, individual economic freedom, and our way of life.” To combat the “ESG movement,” that “threatens the vitality of the American economy and Americans’ economic freedom, the governors, according to the statement, have agreed to lead state-level efforts, including:

  1. “Blocking the use of ESG in all investment decisions at the state and local level”; and
  2. “Banning the financial sector from considering so called ‘Social Credit Scores’ in banking and lending  practices” and “stopping financial customers from discriminating against customers for their religious, political or social beliefs,” such as owning a firearm, securing the border, or increasing our energy independence.”

Readers from outside the United States will be forgiven if they find this piece of political theater mystifying. It could well be confusing for them that in the name of freedom the governors are allying to try to prevent the implementation of Department of Labor guidelines that merely permit but do not compel fund managers to take ESG-related considerations into account in making investment decisions. All of this will make more sense to non-US readers if they understand that in this particular exercise the achievement of policy goals is entirely subordinated to the objective of trying to stoke a fever-level sense of grievance and outrage in a targeted component of the electorate.

Readers of this site know that I have long advocated dropping the use of the term ESG. My primary reasons for wanting to drop the acronym is that it is too broad and ill-defined, making it difficult to discuss and consider from a policy standpoint. The governors’ press release provides another reason to drop the acronym, which is that the very shorthand nature of the acronym makes it an easy target for populist opposition and anger.

I know that there are likely readers – perhaps many of them – who support or even applaud the governors’ political statement. It is beyond the objectives of this blog for me to engage on the merits or demerits of the governors’ statement from a policy standpoint. The reason I have brought all of this up, and the reason this is a worthy topic for this blog, is that ESG is a hot-button issue in the D&O insurance industry. D&O insurance underwriters rightfully are concerned about the possibility of ESG-related D&O claims. As the lawsuit recently filed against the board of Shell demonstrates, the possibility for these kinds of claims is real.

The reason the governors’ statement and actions are relevant to this consideration of the extent of ESG-related D&O claims risk is that the governors’ gesture, and their apparent willingness to fight ESG as a political issue, underscores the fact that ESG is a multi-faceted concern. In the current environment, ESG risk can take many forms. The risk comes not only from the possibility of actions by ESG activists (of the type evidenced in the Shell lawsuit) but also from the possibility of political or other action by ESG opponents. It is a point I have made before, but it is worth reiterating in this context, which in the current political environment, ESG is a far from straightforward issue, one with respect to which companies may find that they are “caught between” dueling or maybe even warring interests.

I know that as an industry we in the D&O insurance space are going to continue to talk about ESG, and we are going to continue to talk about it because we have to. However, I think the reality of the situation is that it is a much messier topic that I think is often appreciated.