A federal judge in Missouri has invalidated a state rule that restricted financial professionals from considering environmental, social, and governance (ESG) factors when providing investment advice. The decision, made on August 14, 2024, marks a significant development in the ongoing debate surrounding ESG investing in the United States.
U.S. District Judge Stephen Bough ruled that the 2023 Missouri regulation, which mandated investment advisers to disclose and obtain consent for ESG-related objectives, conflicted with federal law and infringed upon the free speech rights of financial professionals. The judge also noted that the rule's vagueness made it unenforceable under the U.S. Constitution.
The Securities Industry and Financial Markets Association (SIFMA), a trade group, successfully challenged the rule. Kenneth Bentsen, CEO of SIFMA, argued that the Missouri regulation was unnecessary and disrupted the uniform nationwide regulation of securities markets guaranteed by federal law.
This ruling is part of a broader trend involving ESG considerations in investments. ESG investing, which became popular in the early 2000s, has seen significant growth. Global ESG assets are projected to exceed $53 trillion by 2025, highlighting the increasing importance of these factors in investment decisions.
The debate over ESG investing has intensified in recent years:
- Several U.S. states have passed laws restricting ESG investments
- The U.S. Department of Labor issued rules in 2020 and 2022 regarding ESG considerations in retirement plans
- The SEC proposed climate-related disclosure rules for public companies in March 2022
The Missouri rule was part of a broader push by Republicans in some U.S. states to limit the growing consideration of ESG factors by businesses and investors. This trend contrasts with international developments, such as the EU's Sustainable Finance Disclosure Regulation (SFDR) which came into effect in March 2021.
"State officials could have embarked on a public-information campaign to advance their desired message."
The ruling underscores the complex interplay between state and federal regulations in the financial sector. It also highlights the ongoing debate about the role of ESG factors in investment decisions, a topic that has gained significant traction since the term "ESG" was first coined in 2004 in a UN Global Compact report.
As the landscape of ESG investing continues to evolve, with initiatives like the International Sustainability Standards Board (ISSB) established in 2021 to develop global ESG disclosure standards, the Missouri ruling may have implications for similar regulations in other states. The decision emphasizes the need for a balanced approach that considers both investor interests and regulatory compliance in the rapidly changing world of ESG investing.