Regulatory Implementation

Anti-ESG legislation in the USA: Emerging risk for financial institutions?

Photo by Nadir sYzYgY on Unsplash

Environmental, social, and governance (ESG) investing and consideration of ESG-related risks have grown significantly over the past few years worldwide, with regulators in many countries setting legal frameworks addressing ESG matters.

While the US has been comparatively slow to adopt ESG-related regulations at the federal level, a backlash against ESG investing and climate change considerations and can now be seen at state level. Throughout 2021 and 2022, 18 US states have used their legislative powers to place limitations on ESG investing or to prohibit their state governments from doing business with financial institutions that adopt certain ESG policies, such as decreasing investment in carbon-intensive sectors. This creates new types of risks for financial institutions operating in these states.

Types of anti-ESG regulations

Anti-ESG regulations are typically justified by concerns that ESG investing puts policy and social goals ahead of financial goals, and that ESG or climate risk-related financing restrictions have detrimental impacts on local economies. There are generally two types of anti-ESG regulations:

  • No-ESG-investment regulations: Under this type of regulation, the state is prohibited from investing in strategies that consider ESG factors for any purpose other than maximizing investment returns — investment decisions should be based solely on “pecuniary factors”, and be free of “social, political or ideological interests” (as stated in Florida’s ESG Resolution of August 2022).
  • Boycott regulations: These regulations target financial institutions that are understood to boycott or discriminate against companies in certain industries. They prohibit the state from doing business with such institutions and/or from investing the state’s assets, including pension-plan assets, through such institutions. Boycott regulations affect financial institutions with investment policies that exclude or reduce exposure to fossil-fuel-producing energy companies or with restrictions in place for sensitive industries such as mining, timber production, or firearms manufacturing — particularly if these industries are economically important to the state.

Occurrence and limitations of US state-anti ESG regulations

At present, 18 US states have either proposed or adopted anti-ESG regulations (see Figure 1). Most states with anti-ESG regulation politically lean toward the Republican party, but there are exceptions, like Arizona and Minnesota, which have also proposed such legislation. In contrast, 10 US states leaning toward the Democratic party have enacted pro-ESG regulations or are in the process of doing so.

Figure 1: Capital Monitor: Mapped – The polarization of ESG in the US. 3 October 2022.


Not all regulations that were proposed have been adopted; some failed during the legislative process. Also, most of the anti-ESG regulations only focus on sectors that are economically important to a state (i.e. fossil fuels, agriculture, firearms). Moreover, Because the regulations focus on the materiality of financial factors, this could inadvertently lead to ESG considerations being acceptable under the law – if ESG consideration are indeed found to be financially material (as the debate about “Fiduciary Duty in the 21st Century” was thought to have established).

Proponents of anti-ESG regulation formed a lobby group, the State Financial Officers Foundation (SFOF), with a proclaimed mission “to drive fiscally sound public policy, by partnering with key stakeholders, and educating Americans on the role of responsible financial management in a free market economy.” The SFOF brings together the treasurers of 23 US states.1

A counterinitiative, For The Long Term (FTLT), was created to support public treasurers’ desire to deliver sustainable long-term growth. Its members have accused Republican treasurers of politicizing the way taxpayer money is managed in their states and of trying to block progress. FTLT assembles the state treasurers of 16 US states2 and the comptroller of New York City.

Photo by Tamara Gak on Unsplash

Actual and potential impacts of these regulations

US anti-ESG legislation contradicts the direction ESG regulations are taking globally, and they may eventually be hindered by limitations of their own making. However, some risks have manifested for financial institutions, especially the withdrawal of state funds and political backlash.

Withdrawal of state funds

The most immediate impact is state funds being withdrawn from investment managers:

      • Two months before enactment of its Boycott Bill in March 2022, West Virginia pulled assets from a fund managed by BlackRock, alleging that the investment manager advocated for companies to “embrace net-zero investment strategies that would harm the coal, oil and natural gas industries.”
      • In October 2022, the state treasurers of Louisiana and Missouri publicly affirmed they had each withdrawn USD 500 million from BlackRock, claiming “anti-fossil fuel policies” and a “record of prioritizing ESG initiatives over shareholder returns.”
      • In August 2022, the Texas State Comptroller published a list of 10 financial firms and 348 investment funds that governmental entities must eventually divest from. The financial firms were selected based on a higher-than-average MSCI ESG rating and membership in Climate Action 100+ and the Glasgow Financial Alliance for Net Zero initiative.

Political backlash

These anti-ESG laws could:

      • generate a broader political backlash against acknowledging the risks of climate change;
      • devalue sustainable business approaches; and
      • politicize investment decisions.

Ultimately, if the goals of ESG investing and the management of ESG- and climate-related risks are presented as conflicting with the fiduciary duty of investment advisers, pension fiduciaries and banks under state law, this debate, which seems anchored in the premise that investment decisions require the incorporation of all material value drivers, including ESG factors, will be re-opened — at least in the US.

Moving forward

Ultimately, financial institutions doing business in the US should familiarize themselves with these laws when they contemplate revising or tightening their fossil-fuel policies or offering ESG investment services.

Justification for financing restrictions or the explanation of ESG investment strategies should objectively argue, as clearly as possible, how financial risks can be prevented by such ESG approaches or how measurable financial gains can be pursued through such strategies.

1. Alaska, Arizona, Arkansas, Florida, Georgia, Idaho, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Texas, Utah, West Virginia, Wyoming.  
2. California, Colorado, Connecticut, Delaware, Illinois, Iowa, Kansas, Maine, Massachusetts, Nevada, New Mexico, Oregon, Rhode Island, Vermont, Washington State, Wisconsin  

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