The blowback against environmental, social, and governance (ESG) initiatives in investments and corporate strategies is quickly building momentum in conservative politics.

“It has become an identifying political issue, where politicians can plant a flag to declare where they stand,” said Lance Dial, a partner at law firm Morgan Lewis. “This is really more about politics than about the law.”

Ellie Dawson, a partner at law firm Crowell and Moring, said the anti-ESG trend “stems from the perception that considering ESG factors is anti-capitalist or somehow not prioritizing shareholders’ best interests.”

In many states where anti-ESG bills are not just up for debate but have been signed into law, the underlying motivation appears to be protecting core industries—oil and gas, coal, even agriculture—from losing access to capital.

“They’re interpreting the motives of the ESG movement as a value judgment, as opposed to being financially related,” Dawson said.

Opposing ESG initiatives has become a rallying cry in Washington for Republicans.

In February, the House Financial Services Committee formed an ESG working group that will “combat the threat to our capital markets posed by those on the far-left pushing [ESG] proposals,” it said in a press release.

Conservatives say ESG initiatives are another example of far-left progressives trying to use federal government institutions to support their ideologies, including controlling climate change.

It is likely various House committees will begin investigating regulators viewed as pushing a pro-ESG and pro-climate change agenda. First on the list for scrutiny will be the climate-related disclosure rule proposed by the Securities and Exchange Commission (SEC), Dawson said.

The SEC rule would require public companies to disclose the costs to their business caused by climate-related events like floods, fires, and drought as well the effect of environmental regulations on their bottom line. The rule would also require public companies disclose the greenhouse gas (GHG) emissions their business generates. The SEC is reportedly considering tweaks to ease the proposed rule’s mandates based on comments from businesses and the public.

Several would-be Republican presidential candidates, including Florida Gov. Ron DeSantis and former Vice President Mike Pence, have staked out strong opposition to ESG investing and corporate strategies. Another confirmed candidate—biotech entrepreneur Vivek Ramaswamy—has made his opposition to ESG investing a pillar of his campaign.

While politicians at the federal level debate the motivations of ESG investments, state legislators and comptrollers have been taking action.

“It does appear the actions to date are not dissuading companies from backing away from existing ESG and climate commitments. But it could have a chilling effect on future commitments or cause companies to backtrack later.”

Ellie Dawson, Partner, Crowell & Moring

Several types of anti-ESG state legislation have already been passed into law, Dial said. The most popular type is “no boycott” legislation, according to Dial, who wrote a blog post with colleagues Elizabeth Goldberg and Rachel Mann laying out specific states supporting new legislation.

Texas, Kentucky, West Virginia, and Utah have enacted legislation banning state funds, such as retirement plans, from investing in ESG-type investment products. Texas’ law, SB 13, mandates that state-held retirement funds and permanent school funds divest from companies that boycott the fossil-fuel industry, while Kentucky’s law, SB 205, orders state government entities to divest from financial companies that boycott energy companies.

The Texas law defines “boycott” broadly, but not every company that declines to do business with the fossil-fuel industry is necessarily boycotting it. The law requires two prongs to be met. The first prong examines whether a company is avoiding doing business with a fossil-fuel company because that company engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy. The second prong is whether the company does not commit or pledge to meet environmental standards beyond federal and state law.

Laws passed by West Virginia (SB 262) and Utah (HB 312) don’t go quite as far, Dial said. They ban certain types of government contracting with companies that “discriminate” against energy companies without ordering divestiture.

Another flavor of “no boycott” legislation was also passed by Texas regarding discrimination against the firearm industry. The law, SB 19, prohibits a state government entity from contracting with companies for more than $100,000 unless the company verifies in writing they will not discriminate against a firearms entity or a firearms trade association, Dial said.

Another type of law is no ESG investment regulations, which prohibit the use of state funds for the purpose of ESG or social investment, Dial said. Some states, like North Dakota (SB 2291) and Idaho (SB 1405), have adopted no ESG investment laws. Others, like Arizona and Florida, have issued binding regulatory action for state pension boards, while Indiana and Louisiana have had the attorney general and state treasurer, respectively, issue written opinions on the topic.

“It does appear the actions to date are not dissuading companies from backing away from existing ESG and climate commitments,” Dawson said. “But it could have a chilling effect on future commitments or cause companies to backtrack later.”

Investment managers should “carefully consider the role ESG considerations play in their investment programs and ensure that their ESG processes are clearly disclosed to their investors, understanding that considering ESG for ‘ethical’ purposes may result in the application of some of these new and proposed regulations to the firm and/or its products,” said a separate Morgan Lewis blog post on ESG-related state legislation authored by Dial and Mann.

The post, updated Feb. 16, lists all proposed ESG-related bills by state legislatures in 2023: 24 states have proposed bills that limit ESG investments, 10 states have proposed bills that support ESG investments, and two states—Oregon and Texas—have proposed both types of bills.