Recently, both the Louisiana Attorney-General and the Indiana Attorney-General issued legal guidance that the consideration of ESG factors by investment firms likely would, in the absence of full disclosure, violate the fiduciary duty owed by these investment firms to their investors. In other words, these attorneys-general are effectively stating that if investment firms consider ESG factors when making investments–as many of the largest asset managers are beginning to do–then these investment firms would be subject to legal liability under state law.
This is the latest tactic deployed by conservative politicians who are attempting to counter the recent trend in corporate America–including by some of the largest and most prominent asset managers and investment firms–to demand that companies consider ESG factors and offer disclosures concerning the role of ESG issues in corporate decision-making. It represents a significant escalation from the last action undertaken by these two AGs (and seventeen other state AGs) when they announced the investigation of a ratings agency in connection with allegedly faulty ESG ratings. Such a strategy also exerts additional pressure beyond the recent actions by state legislatures to compel state pension funds and similar public entities to boycott financial firms that supposedly use ESG factors to refrain from investing in certain industries. Now, these attorneys-general are practically inviting plaintiffs to initiate civil lawsuits against investment firms that consider ESG factors when making investments–when the firms do not disclose that they are doing so.
Notably, even though these attorneys-generals’ efforts are focused on the application of state law, the thrust of this guidance runs counter to recent federal rule-making, including by the SEC, which seeks to encourage additional consideration of ESG factors by corporate boardooms. It is also possible that this issue could be mooted by the deployment of adequate disclosures by investment firms sufficient to satisfy the relevant state law; however, it is likely that there would still be litigation concerning whether such disclosures concerning the use of ESG factors were indeed sufficient.
[I]nvestment firms which operate as a registered investment advisor in Louisiana, and which utilize ESG factors or criteria without full disclosure to their investor-clients, are likely in violation of their fiduciary duties imposed by Louisiana law. In Louisiana, those investor-clients include entities such as the Louisiana Treasury and Louisiana State Retirement Boards (La. R.S. 11:262), including the Louisiana State Employees Retirement System (“LASERS”).