Virginia Governor Youngkin Joins DeSantis’ Anti-ESG Alliance

I am an attorney who writes about ESG policy, laws, and regulations.

Florida Governor Ron DeSantis' recently announced anti-ESG alliance has grown with the addition of Virginia Governor Glenn Youngkin. The alliance, announced March 16, is a signed policy commitment by now 20 Republican governors to use the resources of their state to stop the expansion of environmental, social, and governance (ESG). For Virginians, this means Florida's anti-ESG policies are heading your way.

ESG has become a hot topic in Republican circles over the past year, driven by pushback from the business sector. Generally, ESG is a set of investment practices used by pension fund managers when choosing how to invest. Rather than strictly looking at profits, fund managers consider other factors in the three categories of environmental, social, or governance practices. How ESG is measured, and what factors are more important varies from fund to fund and organization to organization, leading to confusion and conflict. These ratings are not just given to the funds, but also to the publicly traded corporations in which the funds invest, leading to push back from the business sector.

Florida and Texas have begun implementing anti-ESG policies, with DeSantis forming an alliance of states to work together to push similar policies. The first step of these policies is to divest the state pension from ESG investments and instruct fund managers to only consider profits when making investments. Florida was able to move quickly because the pension board is comprised of the elected members of the Florida Cabinet. However, the Virginia Retirement System (VRS) is an independent body with a board consisting of five members appointed by the Governor and four members appointed by the Joint Rules Committee, each serving five years. This composition and term length reduces the Governor's direct influence on the VRS, meaning any changes to investment strategy will need to come through legislative action. Youngkin has some avenues available through the use of executive order, as he did when he addressed Critical Race Theory (CRT) in EO-1. However, the impact of such an EO will be limited unless reinforced through legislative action.

Florida's anti-ESG bill, HB-3, is quickly becoming the model for how state legislation will develop throughout the country. The bill tackles ESG from multiple angles, with the core concepts echoed in the joint policy statement forming the anti-ESG alliance. Notably, prohibiting state fund managers from considering ESG factors, banning green bonds at the state and municipal level, and prohibiting "social credit scores" from being used by financial institutions.

The politically divided Virginia General Assembly, with Republicans controlling the House and Democrats controlling the Senate, reduces the likelihood that aggressive anti-ESG legislation will pass. However, the repeal of the Department of Labor ERISA rule relating to ESG passed the U.S. House of Representatives with bipartisan support before being vetoed by President Joe Biden. Virginia is uniquely positioned to pass similar bipartisan legislation.

Governor Youngkin is the former CEO of the Carlyle Group, an investment fund, which gives him an advantage in this debate. Simply, he speaks the language. Youngkin has already come out against ESG disclosure requirements, as is currently being imposed in the European Union and explored by the U.S. Securities and Exchange Commission. If Youngkin can convince the General Assembly that ESG is harmful to state investments and the business sector, bipartisan anti-ESG legislation may be possible in some form.