I am an attorney who writes about ESG policy, laws, and regulations.
Governor Ron DeSantis signed legislation targeting the growth of environmental, social, and governance in Florida. The anti-ESG bill, set to be the model for other states, prioritizes financial returns for state funds and state pensions, prevents the issuance of green bonds, and eliminates ESG considerations in state contracts.
Environmental, social, and governance is a type of financial investing where non-financial factors are considered in making investments. In concept, ESG is about giving investors the ability to choose how their money is used. If an individual is willing to take a lower rate of return to feel like they are making a positive impact, they can select a fund that matches their priorities. However, as ESG grew, it became a tool for large fund managers to impose their priorities on corporations. Corporate executives and conservative leaders began to push-back on ESG.
In August 2022, the Florida State Board of Administration took a first strike at ESG, by divesting the state's pension investments from BlackRock. Larry Fink, the CEO of BlackRock, had become a vocal proponent of ESG and stakeholder capitalism, drawing the ire of conservatives. In unison with Gov. DeSantis, Florida's elected Chief Financial Officer, Jimmy Patronis, also took similar action in relation to the investment of state funds.
However, the action did not specifically prevent ESG. Instead, it shifted the focus back to financial returns, using the pecuniary factors test established under a Trump Administration Department of Labor ERISA rule. As defined in the legislation, pecuniary factor is a factor that "is expected to have a material effect on the risk or returns of an investment based on appropriate investment horizons consistent with applicable investment objectives and funding policy. The term does not include the consideration of the furtherance of any social, political, or ideological interests."
Notably, it doesn't prevent ESG from being considered, but its consideration must be based on financial interests. On Monday, the FSBA disclosed a $200 million investment in a green fund, which some argued was in contrast with the stated anti-ESG policy. However, under the pecuniary factors test, the investment in the fund was allowed because the focus is on financial returns.
The anti-ESG legislation codifies the executive action taken regarding state pensions and state funds, adding the pecuniary factors standard to state statutes and preventing future administrations from rolling back the changes. Additionally, the legislation extends that standard to pensions and funds managed by local governments and agencies.
Going a step further, the bill also addresses "social credit scores" imposed by banks who choose not to do business with individuals or certain business industries because of religions, political, or social stances. Most notably, banks have refused to do business with firearms dealers and those who take pro marijuana stances, as was the case with Democrat Nikki Fried's 2018 campaign for Florida Commissioner of Agriculture.
Finally, the bill bans the issuance of green bonds, or government bonds issued to fund environmental projects. The funding of environmental projects through bonds is still allowed, however they cannot be labeled as green bonds.
Overall, the Florida legislation is a smart and balanced approach to ESG. It allows DeSantis to push-back on ESG without jeopardizing state investments.
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