INSIGHTS | Florida’s Latest Legislative Move Sparks National Conversation on ESG Policies

In one of the furthest-reaching efforts yet, on May 2^nd, the Florida Governor signed into law a bill preventing state officials from investing public money to promote environmental, social and governance goals, and prohibiting ESG bond sales (1).

Making its position clear on ESG and any further integration of the framework into public investments and its broader application by institutions and organizations nationally, Florida now joins a growing list of other states like Kentucky and West Virginia, who have garnered a lot of attention for their anti-ESG stance (2).

One major setback with the new legislation is the outlawing of ESG bond sales which are a typically an alternative approach to supporting renewable energy projects or lowering debt costs for borrowers if they meet greenhouse gas emissions targets. This has caused confusion and disappointment for many analysts as it now means municipalities across Florida will be denied access to large pools of ESG capital. Most concerning however, is the exclusion of ESG risk for rating agencies. In a state like Florida as susceptible to climate change it is crucial that rating agencies can include such risks in their assessments to deliver accurate climate change insurance policies and take better informed decision-making.

The new bill expands on a previous piece of legislation passed in August 2022 that prohibits asset allocators from considering ESG factors in their investment decisions. The expansion now applies to all funds of the state treasury, as well as pension plans, local government funds, and investment of funds raised by citizen support organizations.

Specifically, Florida’s anti-ESG bill prohibits the following:

• The use of ESG factors by state and local governments when issuing bonds and its application by rating agencies to determine bond ratings.
• All state and local entities from considering ESG in their investment process.
• All banks that engage in corporate activism and place an emphasis on Diversity, Equity, and Inclusion (DEI).
• Financial institution discrimination towards customers for their religious, political, or social beliefs, including their support for Firearms or non-renewable energy use such as oil and gas.
• The financial sector from considering to any degree social credit scores in banking and lending practices (3).

In the broader context of the subject Florida’s anti-ESG bill highlights the political debate surrounding the subjective definitions of ESG and how the financial sector perceives and interprets this term. This debate becomes even more intriguing when we consider the existence of disclosure standards such as GRI, which incorporates universal, topic-specific, and industry-specific questions to cater to the diverse interpretations of individuals regarding the meaning of ESG.

While Florida’s new legislation considers ESG as a rigid and inflexible framework that applies universally, scholars and experts, like Florian Berg, have shed light on what they refer to as “aggregate confusion.” This term encapsulates the divergence of perspectives and understandings among different individuals and institutions when it comes to defining ESG (4).

The absence of a universally agreed-upon definition for ESG highlights the complexity of this concept. Nevertheless, it is widely recognized that companies employ the term to encompass nonfinancial risks that businesses face. These risks often revolve around critical issues such as climate change, worker safety, and executive pay (5).

By delving into the complex nature of ESG, an intricate landscape which requires careful consideration and ongoing dialogue can be observed. Through these discussions we can strive to establish a shared understanding and framework for ESG, acknowledging its significance in addressing the non-financial aspects that influence the sustainability and social impact of businesses in today’s world.

Wider impact of ESG bans across U.S.

The shifting political landscape in the US have seen dozens of states introduce new legislation to curb completely all use of ESG principles in investing. Florida’s new anti-ESG legislation just adds to the rapid growth in anti-ESG policies since the start of 2022 and has laid clear the understanding that ESG investing is a clear target.

While the US has certainly been slow to embrace ESG regulations at the federal level, an interesting shift is taking place at the state level. Between 2021 and 2022, 18 states decided to take matters into their own hands by imposing restrictions on ESG investing and banning state government dealings with financial institutions that adopt certain ESG policies. These policies include reducing investments in carbon-intensive sectors. This presents unique challenges for financial institutions operating in these states, introducing new risks to consider (6).

From the growing trend of anti-ESG legislation, Floridas anti-ESG bill is simply going to hinder the US’s own progress including mounting risks for financial institutions and state funds.

State funds are immediately impacted as they are withdrawn from investment managers. For example, West Virginia withdrew assets from a fund managed by BlackRock arguing that the manager’s support for net-zero investment strategies harm coal, oil, and natural gas industries. Meanwhile, Louisiana and Missouri also pulled USD500mln each from BlackRock, criticizing its “anti-fossil fuel policies” and prioritization of ESG initiatives over shareholder returns. Texas published a list of financial firms and investment funds that government entities must divest from based on their high ESG ratings and involvement in climate initiatives.

With such pressing challenges facing the US on ESG, navigating them is going to be an uphill battle. US financial institutions should familiarize themselves with the laws when revising fossil-fuel policies or offering ESG investment services. It is also proposed they objectively justify financing restrictions and explain how ESG approaches can mitigate financial risks or pursue measurable financial gains (8).

Overall, anti-ESG legislation such as that passed in Florida represents a concerning trend that goes against global efforts towards ESG regulations. The impacts of banning ESG extend beyond financial institutions, affecting state funds and creating political consequences, thus these laws undermine the recognition of pressing global issues such as climate risk and social equality.

Sources

https://www.reuters.com/business/sustainable-business/desantis-signs-sweeping-anti-esg-legislation-florida-2023-05-02/

https://news.yahoo.com/not-going-fly-desantis-signs-121648679.html?

https://www.ai-cio.com/news/desantis-signs-florida-anti-esg-bill-into-law/

https://academic.oup.com/rof/article/26/6/1315/6590670

https://news.bloomberglaw.com/esg/desantis-signs-sweeping-anti-esg-bill-targeting-funds-banks

https://www.ecofact.com/blog/anti-esg-legislation-in-the-usa-emerging-risk-for-financial-institutions/

https://capitalmonitor.ai/regions/america/mapped-the-polarisation-of-esg-in-the-us/

https://www.ecofact.com/blog/anti-esg-legislation-in-the-usa-emerging-risk-for-financial-institutions/