ESG investing, which stands for Environmental, Social, and Governance investing, is increasingly facing legal and political challenges in courts across several U.S. states, particularly in so-called “red states” that tend to have conservative political leadership. These challenges are part of a broader pushback against ESG principles, which some state officials and lawmakers view as ideological or politically motivated rather than purely financial or fiduciary considerations.
In recent years, red state attorneys general, treasurers, and other officials have taken active steps to scrutinize and sometimes restrict ESG-related activities by asset managers and proxy advisory firms. For example, Texas and Florida have led efforts to investigate and challenge ESG initiatives on grounds such as antitrust violations and consumer protection laws. In Texas, a federal court allowed a case to proceed against major asset managers accused of conspiring to reduce coal output through participation in global climate commitments, rejecting the argument that their investment activities were protected under existing antitrust safe harbors. This ruling signals that courts may view coordinated ESG-related actions as potentially anti-competitive if they affect industry output or market competition.
Additionally, Texas passed a law aimed at restricting proxy advisers from giving recommendations based on ESG or diversity, equity, and inclusion (DEI) factors unless they provide detailed financial analyses to justify those recommendations. This law was blocked by a federal judge who ruled that it likely violated First Amendment rights by compelling speech aligned with the state’s political views. Proxy advisory firms like Glass Lewis and ISS, which influence institutional investors’ voting decisions, argued that such restrictions would limit investors’ ability to consider important ESG factors.
Beyond antitrust and proxy advice issues, red states have also targeted ESG disclosure requirements and climate-related financial risk reporting. Some states have challenged laws that require companies to disclose climate risks or greenhouse gas emissions, arguing that these mandates amount to compelled speech or exceed state authority. However, courts in other jurisdictions, such as California, have upheld these disclosure laws, finding them reasonably related to substantial government interests like climate protection and investor transparency.
The political framing of ESG in red states often casts it as an ideological agenda that conflicts with traditional fiduciary duties to maximize financial returns. State financial officers from multiple red states have sent letters to large asset managers demanding they scale back ESG rhetoric and proxy voting, emphasizing a return to what they consider “fiscally sound public policy.” This campaign reflects a broader skepticism about ESG’s role in investment decisions, portraying it as a threat t
