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Anti-ESG Legislation Harms Fiduciary Duty

Anti-ESG Legislation Harms Fiduciary Duty

February 1st, 2024


By Steven Rothstein

Ceres Accelerator for Sustainable Capital Markets

This content was originally published by Director’s and Boards.

Boards and directors have many strategic issues to consider as part of their fiduciary duty to their companies, including ESG principles. Despite legislation filed in many states and hostile actions in the U.S. House of Representatives designed to restrict companies and investors from considering these factors, it is clear that boards and directors understand that climate and other sustainability factors present real financial risks and business opportunities in 2024.  

Thoughtful directors consider the risks and opportunities their companies are presented with not just over the next quarter, but also over next quarter-century. On either time frame, companies are facing dramatic increases in physical risks from climate change — like how floods, fires, droughts and other extreme weather conditions impact their facilities, workforces and other aspects of their business operations. They also must consider what are known as transition risks, including the threats facing companies whose products or services will no longer be needed as both the public and private sectors shift to build a more sustainable economy. Companies must be prepared to address these and other risks in the short, medium and long term. It’s a difficult enough task already, and public policy that aims to restrict these considerations will only make it more challenging.  

In early 2023, Ceres launched the Freedom to Invest campaign. We and our many business, investment, academic and labor partners strongly believe that states and the federal government should not be telling investors what they can and cannot invest in, or businesses which risks they should and should not consider. The definition of fiduciary duty should not be changed: lawmakers should leave it to capital market professionals to make responsible investment and business decisions themselves.  

Those states pursuing legislative bans are doing so at the risk of their own taxpayers, pension beneficiaries and economies. In state after state, economic and revenue analyses have found that bills that ban the consideration of climate and other responsible investing risks will have negative impacts. In Kansas, the State Division of the Budget found that such legislation would reduce the Kansas Public Employee Retirement System’s (PERS’s) returns by $3.6 billion over ten years. Arkansas found that a bill would cost the state’s PERS between $30 to $40 million annually if implemented. In states that have passed the bans, municipal governments are finding themselves on the hook for millions of extra dollars in interest payments, a direct result of the legislation. And these are just some of the many examples. 

The good news for financial markets is that the legislative efforts to disrupt responsible decision-making have largely fallen short amid a groundswell of opposition. In fact, only 22 bills of the over 160 filed have passed. Over half were killed and most others are either in limbo or were carried over to the 2024 legislative session. 

While those numbers represent some form of victory for common sense in 2023, the effort to restrict responsible decision-making may not slow down this year. We expect more bills to be filed and considered at the state level and in Congress in 2024, as special interests continue to work with their political allies to bar investors and companies from even considering the financial impacts of climate change and other sustainability issues. 

But those risks are not going to yield to political pressure. In fact, they’re only growing clearer with each year of increasing global temperatures and worsening weather events. Companies — led by their boards — must stay the course and work to address the mounting risks they will face in the coming months, years and decades, exercising the responsible decision-making that is at the heart of their fiduciary duty.