Top 5 stories from ESG Dive

The Securities and Exchange Commission passed its highly anticipated climate disclosure rule on March 6, nearly two years after the agency released its initial proposal. The final rule — a pared-down version of the original — scrapped scope 3 emissions disclosures entirely and scaled back scope 1 and scope 2 reporting requirements.

The regulation’s narrower parameters come against a backdrop of strong pushback from companies and mounting political criticism. The SEC said it received over 24,000 comments since releasing the rule in March 2022, including around 8,100 in the 72 hours leading up to Wednesday’s open hearing, Chair Gary Gensler told reporters. The agency announced plans to vote on the rule last week, following reports of it dropping scope 3 requirements from the rule.

Though the climate rule was approved, it passed with a 3-2 vote count, with three Democrats — Gensler, Commissioners Caroline Crenshaw and Jaime Lizárraga — supporting it, and two Republicans — Commissioners Hester Peirce and Mark Uyeda — opposing it. Despite their party affiliations, Crenshaw was nominated by then-President Donald Trump and unanimously approved by the Senate in 2020, while President Joe Biden nominated Uyeda in 2022. The tight vote stood in contrast to the unanimous approval the commission’s only other agenda item, amendments to the national market system stock order execution disclosure requirements, received.

The split vote hinged on the commissioners’ views on the SEC’s authority — or lack thereof — to probe companies for climate-related disclosures. Even the rule’s supporters argued the agency had not gone far enough, while its critics alleged the agency had gone too far.

The conflicting opinions from either side of the aisle set the stage for what followed soon after the 866-page rule was approved and made its way to the Federal Register. Environmental groups such as Sierra Club and Earth Justice said they were considering legally challenging the SEC’s “arbitrary removal of key provisions” from the final rule, while a coalition of 10 Republican states said they had launched a lawsuit in the U.S. federal appeals court to block the implementation of the climate disclosure rule. 

“While the final decision is more watered-down than we initially anticipated, it’s important to note it was a bill designed to get a yes vote, which it ultimately did,” Alyssa Rade, chief sustainability officer at supply chain decarbonization platform, Sustain.Life, said in an email to ESG Dive.

The SEC is overextending its authority

Peirce, the longest-tenured commissioner, said during her testimony that though the agency had dropped scope 3 reporting requirements and put forward a proposal that was different from the original, it still sought to “spam investors with details” about climate.

“These changes do not alter the rules fundamental flaw: its insistence that climate issues deserve special treatment and disproportionate space in commission disclosures and managers and directors’ brain space,” Peirce said. 

She said she did not support the rule because the commission failed to justify this “disparate treatment,” and such climate-related disclosures would “overwhelm investors, not inform them.” Peirce also said the commission could “trigger a hodgepodge of requirements tailored to meet the demands of a fast and ever-expanding panoply of special interests” that could include stances on abortion, cannabis or even war.

Peirce further questioned the SEC’s authority to demand such disclosures, and said the agency wasn’t created to satisfy the wants of every investor, but to serve the “interest of the objectively reasonable investor seeking a return on her capital.”

“We lacked the expertise to oversee these special interest disclosures and only a mandate from Congress should put us in the business of facilitating the disclosure of information not directly related to financial returns,” Peirce said.

Uyeda’s testimony mirrored Peirce’s criticisms. He said the commission had “ventured outside of its lane and set a precedent for using its disclosure regime as a means for driving social change.” He added that if it remained unchecked, there was potential for “further misuse of the commission's rules for political and social issues and an erosion of [the] agency's reputation as an independent financial regulator.

Peirce and Uyeda both opined that the rule could have been re-proposed rather than approved Wednesday. Gensler later told reporters that re-proposals are a process the agency has not used “in decades,” and he is confident the agency followed all requirements of the Administrative Procedure Act.

“I think this final climate risk disclosure role is well within the agency's mandate,” Gensler said. “It's solely focused on disclosures to investors [and] it’s grounded in materiality.”

The SEC “is doing what it was designed to do”

Crenshaw delivered the commission’s most pointed criticism of the rule’s absence of scope 3 reporting. While she supported the approval of the rule, she told the agency it had a remit to go much further, including maintaining the proposed rules scope 3 requirements and broader scope 1 and scope 2 reporting requirements. Crenshaw said that, while the finalized rule “is better for investors than no rule at all,” it “adopts an unnecessarily limited version of [climate-related] disclosures.”

“The Commission has clear authority under the Securities Act and the Exchange Act to require disclosures that are in the public interest and for the protection of investors, as today's rule is,” she said. “This well-established authority has been consistently relied upon and affirmed and reaffirmed across dozens of disclosure rulemakings over multiple decades. And this authority would have supported a more robust rule.”

Before the vote commenced, Gensler said that the “SEC has no role as to climate risk itself,” but the agency did have a role with regard to disclosures. However, during a media roundtable after the vote, he noted that the final version of the rule was “responsive to the various comments [made] by investors and issuers.”

Lizárraga, who cast the final deciding vote, said that the climate-related disclosures proposed by the commission were “no different from many of the commission’s existing disclosure requirements,” and responded to “investor demand for standardized and comparable information on climate related risks and impacts.”

He added that the rule should also prevent greenwashing, as it holds registrants liable for any materially false or misleading statements regarding climate risk.

Lizárraga said the commission was well within its authority to propose climate disclosure rules because climate risks can be material to investments and voting decisions, and these risks, ultimately, can have a material impact on a company’s bottom line.

“The commission is doing what it was designed to do: Protect investors and foster transparent capital markets by improving the reliability, consistency and comparability and material climate risk disclosures for investors,” Lizárraga said.

The climate disclosure rule will go into effect 60 days after it is entered into the Federal Register, which it still has not been as of press time.

A rise in anti-ESG proposals propelled an increase in ESG proposals submitted in the 2024 proxy season, according to a recent analysis from Morningstar. According to the firm’s proxy-voting database, ESG proposal growth slowed to 3% this year, compared to 12% and 19% year-over-year increases in 2023 and 2022, respectively. 

Governance-focused proposals at companies targeting shareholder rights were popular, helping boost average support for governance proposals to 35%, up from 30% in 2023, according to the firm’s ESG research arm Morningstar Sustainalytics. The rise in support for these governance proposals helped the overall ESG resolution approval rate stay flat at 23%, despite environmental and social proposals receiving an average of 16% support, down from 19% in 2023 and 33% in 2021.

A 2021 change in the no-action process by the Securities and Exchange Commission allowed proposals that raise social issues “with a broad societal impact” to be included and aided a rise in ESG proposals beginning in 2022. Diligent Market Intelligence reported last month that a record number of ESG proposals went to a vote this year. 

However, Lindsey Stewart — the report’s author and director of stewardship research and policy at Morningstar Sustainalytics — said in the analysis that this year’s increase came with “a twist in the tale.”

“For the first time, the growth in new resolutions was dominated by proposals from ‘anti-ESG’ filers — those seeking to advance strongly conservative, or net zero skeptic social policy aims,” Stewart wrote.

Conventional ESG proposals stayed almost exactly even — 558 this year, compared to 557 in 2023 — however, 20 additional anti-ESG proposals were filed in 2023. Anti-ESG proposals rose nearly 30% — compared to a 3% overall increase — from 67 in 2023 to 87 filed as of June 30, the end of proxy season.

Despite this rise, anti-ESG proposals remain unpopular with shareholders. Morningstar estimated that such proposals received just 2% of support, down from 9% in 2022 when they first began appearing on company proxy agendas.

Morningstar said excluding anti-ESG proposals raises average support for ESG proposals to 26%. Stewart, however, said that given over 200 anti-ESG proposals have been submitted in the last three years with no evidence of growing popularity, “it’s reasonable to conclude that their point is to gain attention rather than shareholder support.”

Support for environmental and social proposals continued to decline in 2023, but Stewart said the decline slowed and the continued fall cannot be entirely chalked up to the increase in “poorly supported anti-ESG proposals.”

Support for governance-related proposals ultimately helped bolster ESG proposal support this season. Support for governance matters was on a downward trend in 2022 and 2023, as they also began comprising less than half of all shareholder proposals each year. Morningstar tallied 243 governance-related proposals this year, including eight anti-ESG proposals, down from 296 in 2021. 

Last year, the decrease in support was largely attributed to the top-two asset managers BlackRock and Vanguard, as well as other large but “less vocal” firms, chalking up more proposals as micromanagement. While Stewart said “it looks safe to assume that they still hold that view” based on this year’s data, a final determination on what is driving the continued fall won’t be able to be determined until annual proxy-voting records are published.

Morningstar’s analysis aligns with prior reporting from Diligent, as well as law firm Freshfields and the Sustainable Investments Institute, which have all pointed to the falling ESG approval rates this proxy season.

The Securities and Exchange Commission’s climate risk disclosure rule has gone through quite the journey over the past two years. The rule was first proposed in 2022, mandating companies describe their levels of greenhouse gas emissions and strategy toward reducing climate risk on their Form 10-K — an announcement that was met with pushback from both companies and politicians, particularly state and federal Republicans.

After pushing out its initial release and reviewing over 24,000 comments, the SEC passed the highly anticipated rule with a 3-2 vote earlier in March. The final rule scrapped scope 3 emissions disclosures entirely and scaled back scope 1 and scope 2 reporting requirements.

Despite the final rule being a pared-down version of the original, the regulation faced legal action almost immediately, both from critics who said the SEC had gone too far and from supporters who said the SEC hadn’t gone far enough. Consequently, the agency announced its decision to stay the rule in April as it works through these legal challenges.

Though the rule’s implementation has been halted as of now, it is just one of a plethora of climate regulations American corporations must potentially comply with going forward. This includes disclosure requirements both on home territory with California’s two climate bills — Senate Bills 253 and 261 — and abroad with frameworks like the European Union’s Corporate Sustainability Reporting Directive.

In July, ESG Dive — in collaboration with its sister publication, CFO Dive — hosted a virtual event focusing on how industry leaders and C-suite executives could set their respective companies on a smart path to compliance against the backdrop of the SEC’s climate rule and other disclosure regulations. Experts from Ceres, Morningstar and Morgan, Lewis & Bockius LLP shed light on what the recent coalescence of global reporting frameworks, the Supreme Court’s Chevron ruling and the plethora of legal challenges being faced by the SEC rule entail for climate disclosure requirements going forward.

Here are our top takeaways from the “Risk & Reward: Complying with the SEC’s Climate Rule” event.

Lagging enthusiasm for climate disclosures from regulators

After the SEC backed away from an initial rule that would have required all public companies to disclose their full scoped emissions, Lindsey Stewart, director of stewardship research and policy at Morningstar Sustainalytics, said the final rule showed a growing gap between disclosures investors want and the regulations being promulgated.

“We've really ended up with a very different rule from what was proposed in 2022,” Stewart said. “I think a lot of the high ambition that we saw around COP26 … where investors and companies were expected to lead the drive towards net-zero and towards climate, for reporting and disclosure of climate risk, a lot of that initial enthusiasm appears to have subsided in the time that has elapsed since.”

Stewart said the comment letters received by the SEC showed that, in addition to a baseline expectation of disclosure of greenhouse gas emissions and material climate risks and opportunities, investors are looking for company boards to have an “appropriate level of climate competence” across management.

How companies can best prepare for disclosure requirements

“You need to start preparing now,” said Erin Martin, a partner at Morgan Lewis who counsels public companies and their boards on securities regulation, capital markets transactions and corporate governance matters. Martin noted, however, that such preparations would also be affected by the “ton of uncertainty” surrounding disclosure requirements.

“That's going to be challenging for any public company … to address the changing and evolving landscape of regulation,” she said.

Martin said companies will have to consider things like where they should focus their time and resources and what counts as “financially material” to adhere to the growing disclosures. 

She said that though determining what counts as financially material, and what isn’t, for a company might be time-intensive work, she has counseled her clients to “not sit and wait for the courts to decide,” alluding to the multiple legal challenges being faced by the SEC rule. 

Martin noted that although the SEC’s legal battle might take upwards of 18 months to work through, eventually, some pieces of its disclosure rule — if not all of it — “will be required.”

“In order to ensure that you can provide accurate information responsive to the SEC requests and rules … you need to have processes in place today to anticipate those rules so you can ensure that you have accurate disclosure that you're providing, under the federal securities laws to your various stakeholders,” Martin said. “We can't just sit and wait.”

SEC rule vs. other climate disclosure regulations

Much has been said about how the SEC’s final rule compares to other disclosure requirements, such as California’s climate bills and Europe’s CSRD — which still require scope 3 emission disclosures. Jake Rascoff, director of climate financial regulation at sustainability nonprofit Ceres, said the importance of having a federal regulation that mandates climate disclosures on a financial report is irreplaceable.

“To those who say, why do we need the SEC rule when we have California and Europe and ISSB? I think there is no real replacement for having this information in an SEC filing,” Rascoff said during the panel.

He said investors defer to a company’s 10-K or S-1 filing — which provides information on a company’s activities and financial performance — when evaluating its due diligence or investment stewardship efforts. Rascoff said such SEC-mandated filings were “critically important for improving the consistency and comparability” of climate-risk disclosures.

Rascoff said an SEC filing is subject to “a level of rigor and scrutiny that doesn't necessarily exist for voluntary disclosures or even other …  jurisdictions’ requirements.”

“The whole point of disclosure is to provide investors with the necessary information to make an informed investment decision, and then empower investors through that disclosure to make those determinations,” Martin noted when speaking about the SEC’s authority to mandate climate disclosures.

Challenges to compliance

Experts speaking on the July 11 panel said challenges to comply with the rule will vary depending on how an individual or group interacts with it. For investors, Stewart said, among the “challenges galore” will be navigating the various frameworks that already exist, including those in California and the EU. Companies navigating the fragmented environment will also have a more difficult time succinctly telling the story of how their sustainability mission coincides with their finance story.

“It certainly isn't going to be easy for companies to effectively communicate [their sustainability and finance story] across a fragmenting environment,” Stewart said. “So let's hope that this level of fragmentation doesn't last forever. I guess each jurisdiction had to start somewhere. We are where we are, and let's move forward from here.”

Martin, who spent more than 13 years in the SEC’s Division of Corporation Finance, said the rule will also place increased pressure on the agency’s regulators to determine compliance. She said the agency will need to ensure there is appropriate training and the right staff makeup to ensure they can determine if a company’s filing is materially compliant.

What the Chevron ruling means for ESG

The U.S. Supreme Court’s ruling in Loper Bright Enterprises v. Raimondo, which overturned the Chevron doctrine, has threatened to upend administrative law procedures to a varying extent. The fate of regulations in a post-deference era may come down to a more case-by-case analysis. The doctrine was used to dismiss a challenge to a Department of Labor rule allowing pension fund managers to consider ESG factors, and that case is currently under consideration by an appeals court.

Rascoff said the challenges to the SEC’s rule in the U.S. Eighth Circuit of Appeals were made more challenging by the Loper Bright ruling. He said the agency is facing an “uphill battle” to protect its rule.

“Consensus opinion is [that] this rule is unlikely to survive litigation completely intact,” Rascoff said. “I would hope elements of it do survive.”

Martin said that while Chevron gave agencies leeway to interpret ambiguous statutes, the SEC has been given broad discretion to implement disclosures “it views to be necessary for investors” by the Securities Act of 1933. Because of this, she does not expect the Loper Bright decision to lead to any rules being immediately tossed. However, the ruling will give opponents an additional method by which to challenge the agency’s rulemaking process. 

When it comes to the SEC’s current litigation, Martin said the lack of Chevron deference may add more support for arguments that the climate-risk disclosure rule is “arbitrary and capricious,” but does not mean the rule will be completely tossed.

“It's not, we have to start over. That's not what's at play here,” Martin said. “To be clear, [the Loper Bright ruling] does have a big impact. Just maybe not in this very small technical space right here.”

ESG has become increasingly prominent over the past decade, serving as a critical factor for investors, employers, consumers, lawmakers and voters alike. 

Several events and conferences scheduled for this year target executives and corporate leaders in the sustainable business space, providing opportunities to connect and engage in discussions around how to incorporate ESG into their respective company frameworks.

Upcoming conferences will touch on sustainable finance, corporate strategy and governance, climate change, supply chain, social impact and more. While most events have returned to in-person formats, some are still offering a hybrid option.

Here are some of the most notable ESG conferences taking place in the U.S. for the remainder of 2024. We’ve also included a look back at the top events from the first half of this year.

Are there any other events you think ESG professionals would be interested in? Drop us a line at [email protected].

Sustainability Week US
June 12-13 in New York

Sustainability professionals are meeting more challenges in achieving their targets, from complex laws and reporting rules to a need for change in company culture and staff skills. This hybrid event, hosted by the Economist, will bring together businesses, policymakers and government. One-on-one meetings and exclusive closed-room sessions such as the CSO Leaders’ Club will provide insight on how to achieve success.

GreenFin 24
June 18-20 in New York

GreenFin 24 will convene institutional investors, corporate finance and sustainability executives, financial institutions and sustainable finance and investing policymakers. Last year's registrants represented more than $60 trillion in assets under management and $4 trillion in assets owned. Tracks include corporate finance and reporting, ESG ecosystem, financing the transition, natural capital, policy and the investor view.

Carbon Capture Technology Expo North America 2024
June 26-27 in Houston, Texas

The Carbon Capture Technology Expo is geared toward discussing the increasing role carbon capture, utilization and storage will play in the shift to a net-zero carbon economy. The event will gather experts from around the world to discuss the latest technology being used for carbon capture, storage, transport and unique ways of utilizing carbon dioxide to produce net-zero fuels and for other manufacturing processes.

Aspen Institute: Aspen ESG Summit
July 9-11 in Aspen, Colorado

The Aspen ESG Summit 2024 is designed as a dialogue among business leaders, along with long-term investors, corporate governance experts and those who advise, prod and regulate business. This year's theme is the Transformation Agenda.

Climate Week NYC
Sept 22-29 in New York

Climate Week takes place every year in partnership with the United Nations General Assembly and is run in coordination with the United Nations and the City of New York. The official program brings together the most senior international figures from business, government, civil society and the climate sector.

Sustainability USA 2024
Oct. 7-8 in New York

The Reuters event, titled “Sustainability USA 2024,” will convene over 750 senior decision-makers spanning institutional investors, policymakers, data providers, standard setters, banks and businesses to share strategic insight and practical solutions to help implement data-driven sustainability strategies and compliance under regulation.

Verge 24
Oct. 29-31 in San Jose, California

Verge 24 is a climate tech event, bringing together leaders from business, government, solution providers and startups. Tracks include buildings, carbon, energy, food, startup and transport.

2024 ESG Summit
Nov.14 in New York

The Conference Board’s “2024 ESG Summit” aims to equip senior sustainability leaders with the tools and insights needed to cultivate effective partnerships across the public, private and non-profit sectors, as well as the entire supply chain. The event will include speakers from corporate, nonprofit and governmental spheres who will discuss the benefits of addressing climate and financial risk through collaborative action over solitary efforts.

A look back at ESG conferences from the first half of 2024

GreenBiz 24
Feb. 12-14 in Phoenix

GreenBiz 24 is for sustainable business professionals and leaders beyond the sustainability function, including CEOs, CFOs, COOs, CIOs, heads of legal, supply chain, human resources, investor relations. Topics for discussion include what's next in decarbonization, biodiversity, supply chains and strategic communications.

Read ESG Dive’s coverage of GreenBiz 24, highlighting how the event served as a breeding ground for discourse on what obstacles corporations are facing as scrutiny on ESG and sustainability continues to rise.

Responsible Business USA
March 26-27 in New York

The Reuters event, titled “Responsible Business USA 2024,” brings together CEOs, senior sustainability, legal, communications and finance executives to share ideas and insights on how to collaborate, communicate, and comply with sustainability regulations and integrate it into operations.

Read ESG Dive’s coverage of Responsible Business USA 2024, highlighting how regulation compliance and curbing emissions were key themes at the event.

EarthX2024
April 22-26 in Dallas

EarthX2024 Congress of Conferences gathers environmentalists, conservationists, scientists, academics, entrepreneurs, advocates and political leaders engaged in the environmental space.

Circularity 24
May 22-24 in Chicago

Circularity 24 is targeted at professionals in corporate strategy, sustainability product design, sourcing, manufacturing, distribution, finance, as well as entrepreneurs, nonprofits and trade associations, investors, public agencies and policy experts. Tracks include business innovation and strategy, policies, materials, next-gen products and packaging, social impacts and supply chain.

ESG is taking center ring of the ideological battle happening at the state level across the country. The fight has pitted liberal-leaning states like California and New York, which often support ESG-focused investment frameworks, against conservative-bent ones like Florida and Texas that are typically campaigning to ban consideration of ESG in its funds and policies.

With the upcoming presidential election and an impending climate disclosure rule from the Securities and Exchange Commission, both parties are doubling down on their respective stances, passing new bills and regulations that could impact how businesses approach their environmental, social and governance strategies.

Florida and Texas lead the state-level push against ESG

Several Republican politicians in Florida and Texas have become the national faces of the anti-ESG movement.

Under the direction of Gov. Ron DeSantis, Florida is leading the movement against ESG initiatives, looking to punish asset management firms who consider environmental, social and governance principles or have ESG funds. 

BlackRock is one of the DeSantis administration’s favorite targets. The governor directed the state to divest $2 billion in assets from the Larry Fink-led firm for its ESG policies last December. Florida, however, still invests an estimated $12.9 billion with the company, according to research credit rating agency KBRA released last month.

DeSantis began expanding Florida’s stance in the arena earlier this year when he created a coalition of 19 states in March to restrict the use of ESG in investing at the state level. The Florida state legislature followed the governor’s lead and passed a bill prohibiting the use of ESG consideration by state or local governments in issuing bonds; banning any preference due to ESG factors or ratings in procurement; and outlawing consideration of social credit scores by banks. DeSantis signed it in May, shortly before announcing a run for the Republican presidential nomination.

When announcing the bill’s signing, DeSantis said the state will continue to take a national lead in a fight against banks and investors “who’ve colluded to inject woke ideology into the global marketplace.” As a candidate for higher office, he released a “Declaration of Economic Independence” where he pledges to end the use of ESG by investors should he be elected president.

“There will be no ideological litmus test for getting a loan, establishing a bank account, or running a business,” it says.

Though not an official member of DeSantis’ coalition, Texas is on a similar crusade against the use of ESG in investing. While Florida may be making the most noise, the Lone Star State was quicker to exercise its legislative power.

In January, Texas Attorney General Ken Paxton used legislative groundwork laid two years prior to prove the state’s pushback against ESG came with enforcement. Paxton — who was impeached and acquitted of corruption in the state legislature this year, but awaits criminal trial next April for securities fraud — accused CitiGroup of violating a 2021 state law prohibiting businesses from being government contractors if they have policies “that discriminate against or boycott firearm or ammunition companies.” The state agency overseeing the Texas-record $3.4 billion municipal bond dropped Citi and reconfigured the deal as a result.

Another 2021 law requires state pension fund managers to divest from institutions that “discriminate against or boycott fossil fuel companies.” BlackRock was among the initial 10 firms on the state comptroller’s list last year banned from doing business with the state, along with 348 mutual funds the state had to divest from. A June bill restricting state insurers from using ESG scores and metrics not based on “sound actuarial principles” or that don’t “bear a reasonable relationship to the expected loss and expense experience related to insurance risks” went into effect in September.

Florida and Texas may be the public faces of the anti-ESG movement, but there’s a broader resistance being led by Republicans in state houses and governors’ mansions across the nation. State attorneys general have also played key roles, serving as the legal muscle behind states’ efforts to restrict the consideration of ESG in investments. 

Paxton joined AGs from 26 states in appealing the dismissal of a lawsuit that challenged a Labor Department rule allowing retirement fund managers to consider ESG factors. The Biden administration regulation was finalized this January, and the coalition’s lawsuit was initially tossed in September. However, led by Paxton and Utah AG Sean Reyes, the group said they’re willing to keep fighting the case all the way to the U.S. Supreme Court.

Victor Flatt, the environmental law chair at Case Western Reserve University, told ESG Dive he conceptually divides those with genuine concern about whether the inclusion of climate change and other ESG factors actually yields the greatest return on investments from those who oppose the principle as a result of the broader cultural movement.

“I think, from the perspective of an anti-ESG politician, it's like they feel like [ESG] is a house of cards that has just been built up and created to get policies in place that politically were not able to happen in the United States,” Flatt posited.

Jason Isaac, the director of the Texas Public Policy Foundation’s Life:Powered national initiative, told the House Ways and Means Committee last week that ESG targets “unequivocally” force companies to reconcile a distortion in decision-making with maximizing profits. Isaac, a former Republican Texas state representative, said three-quarters of the executives for S&P 500 companies have their compensation tied to ESG goals. Marlo Oaks, Utah state treasurer, at the same hearing, said some studies have shown ESG proxy measures to have a negative impact on financial returns. 

“The proxy vote is one of the very important roles that an owner of a stock has,” Oaks told the committee. “They can exercise their right to vote their shares on issues that come before a corporation, and, unfortunately, this process is being hijacked.”

Chris Fidler, head of industry codes and standards for the CFA Institute, told ESG Dive he was worried about the types of anti-ESG legislation being advanced at state levels. He said he considers laws outright prohibiting the use of ESG considerations fall among the “most concerning.” Other bills that boycott businesses for building ESG into their operations “aren’t exactly new,” according to Fidler, and represent a return of local protectionist policies.

“Some states have proposed that you couldn't even … consider ESG information when you're making an investment decision. And that just kind of blows my mind,” Fidler said. “There's a fiduciary duty for [fund managers] to continue to take into account all relevant information, and you can't just tell people to ignore certain information because it doesn't agree with your political views.”

California and New York set blueprint for pro-ESG regulation

California and New York are on the opposite end of the spectrum as Florida and Texas, introducing several pieces of legislation over the past decade that promote ESG-aligned investments and taking regulatory action on related environmental and social issues.

California Gov. Gavin Newsom signed two major climate-related legislative measures — Senate Bill 253 and Senate Bill 261 — into law in October, which push for more transparency from large companies. SB 253 would require businesses operating in California with annual revenues exceeding $1 billion to report their greenhouse emissions each year, whereas SB 261 would require business entities with revenues exceeding $500 million to publicly disclose their climate-related financial risks and countermeasures.

Though California’s bills might not directly impact the SEC climate disclosure rule as it has already been drafted, experts believe they are likely to have a ripple effect on climate disclosures and investment policies in other states.

“With California under SB 261, as well as the SEC creating frameworks for governmental reporting of climate-related financial risks, other states may be more likely to also adopt their own disclosure requirements that complement the SEC rule,” said Allison Smith, an attorney at Stoel Rives LLP focused on environmental and energy law.

Shortly after approving the climate bills, Newsom also signed Senate Bill 54, requiring venture capital firms headquartered or operating significantly in the Golden State to annually report the number of diverse founders they invest in and disclose data about their race, sexual orientation, gender identity, disability and veteran status. This new bill, in particular, advocates for more social data disclosures — an aspect of ESG reporting that historically lags behind environmental and governance disclosures.

SB 54 follows the passage of Senate Bill 1162, a pay transparency law passed last year in California.

The blue leaning West Coast state, which has served as a harbinger for climate action, has made substantial moves to incorporate an ESG framework within both its state policies and investments over the last decade, according to KBRA.

California was the first state to adopt a cap-and-trade program to curb greenhouse gas emissions in 2013 and to ban the sale of new fossil fuel-powered vehicles by 2035 last year — a move that was followed by 17 other states, including New York, Pennsylvania, Colorado and Virginia.

However, Smith notes that though California has often been the “tip of the spear for state-level climate policy,” the recent momentum in greater transparency has been driven, at least in part, by market forces.

“The state’s foray into ESG with broader requirements for GHG emissions and climate-related financial risk disclosures is aligned with a wave of voluntary climate-related disclosures, and related voluntary emissions reduction goals, by large companies in the U.S. and abroad,” she said.  

Climate regulations aside, California also has two of the nation’s largest state pension funds: the California Public Employees’ Retirement System and the California State Teachers’ Retirement System with $467 billion and $311 billion in assets, respectively, according to KBRA. Both funds actively integrate ESG issues into their investment decisions. 

The California state Senate passed SB 252 in May, which would require both pension funds to stop investing in fossil fuels and liquidate close to $15 billion in holdings. However, the bill is currently pending in the state legislature, and its passage is unclear.

Following in California’s footsteps, New York also banned the sale of new fossil fuel-powered cars by 2035 and established a cap-and-trade program under the Regional Greenhouse Gas Initiative with other Northeastern states, such as Connecticut, Delaware and Massachusetts. The initiative aims to limit and reduce CO2 emissions from the power sector.

Aside from promoting green infrastructure, the Empire State has also incorporated an ESG investment framework within the New York State Common Retirement Fund, which is the third largest state pension fund in the U.S. with $254.1 billion in assets, according to KBRA. According to the fund’s investment philosophy, it considers ESG factors in its investment process “because they can influence both risks and returns.” 

In 2020, New York State Comptroller Thomas DiNapoli announced that the retirement fund had set a goal of net-zero portfolio emissions by 2040, building on the Climate Action Plan introduced in 2019 that sets minimum standards to determine if a company is prepared for a low carbon-transition. Minimum standards for the thermal coal industry led to the divestment of 22 coal companies. In 2022, the fund divested from half of its shale oil and gas companies, selling $238 million worth of stock and debt across 21 businesses. 

This year, the New York City Employees’ Retirement System, the nation’s fourth largest pension fund, and the Teachers’ Retirement System of the City of New York set a goal of net zero emissions in their investment portfolios by 2040 as well. 

New York has also taken measures to increase ESG-related disclosures. Earlier this year, the state Senate proposed Senate Bill S5437, which would require applicable corporations to annually prepare a climate-related financial risk report, and Senate Bill S636A, which would require certain companies and corporations to report their employee’s gender ,race and ethnicity data. Both bills have yet to be passed by the Senate.

While California and New York are often leading the way, 19 states have enacted laws encouraging the consideration of ESG factors within state investment strategies, as of August 2023, per KBRA. 

Illinois and Maryland, for example, both passed legislation requiring state and local entities to consider sustainability and climate risk when identifying investment opportunities. Meanwhile, New Mexico and Oregon have introduced policies that establish guidelines on the incorporation of ESG factors for state investments and how to formally integrate ESG factors into fund management policy, respectively.

Where the rest of the battleground stands

Together, these four states continue to blaze the path for both sides of the ESG battle, with potential lasting impacts on the state and federal level.  

“While state climate legislation could serve as a blueprint for federal climate regulation, such as SEC climate disclosures, a more likely outcome is that state legislation will put pressure on the SEC to move forward with their climate disclosure laws,” said Nithya Das, chief legal officer at Diligent, a software company that provides businesses with ESG and compliance solutions.

Das also noted that such legislation from California and New York would encourage other climate and social responsibility policies at a federal level as “varying state-by-state requirements may become untenable for business without federal standardization.” 

“Ultimately, climate disclosure obligations and social responsibility policies are unavoidable,” she said. “It is not a question of ‘if’ but rather ‘when.’” 

Recent legislation in states beyond Florida and Texas, however, would disagree with Das’ assessment. 

At least 25 anti-ESG bills passed in 12 states where Republicans control the state legislatures this year, and 19 states have at least one bill opposing the principle on their books, according to S&P Global Market Intelligence. Utah alone passed five bills in the 2023 session. 

Despite the volume of action, Dave Curran, co-chair of law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP’s sustainability and ESG advisory practice, said there has been “very little” enforcement or disruption for businesses from the laws. He added that companies are continuing to integrate ESG into their operations because consumers and investors have shown a persistent demand for it.

“Lots of talk, lots of headlines, but no real action,” Curran said. “There have been absolutely some changes, and the messaging has affected how companies interact with [the ESG] ecosystem. But for the most part, companies are forging ahead, doing exactly what they were doing prior to the political upheaval in this country.”