In case you missed it, the U.S. District Court for the Western District of Missouri recently became the latest court to strike down politically-motivated anti-ESG policies that aim to restrict financial institutions’ investment decisions in Securities Industry and Financial Markets Association v. Ashcroft. As the district judge explained in his ruling:
“the [state regulations] are prempted by federal law and violate the Plaintiff’s constitutional rights. This significant harm outweighs any interest Defendants may have in the Rules and enforcing them.”
Despite initially appealing the decision to the Eight Circuit Court of Appeals, Missouri Secretary of State Jay Ashcroft decided to drop the appeal last month, in a move that legal observers say is meant to avoid a ruling that would further undermine similar types of legislation in Missouri and other states:
“While there is now no opportunity for the specific anti-ESG rules Missouri had promulgated to be revived, the decision to abandon the appeal also means that the Eighth Circuit will not have the opportunity to opine on the legality of these rules—and so avoids the prospect of a legal judgment that would devastate the anti-ESG political project. A ruling from the Eighth Circuit that affirmed the district court’s holding that the anti-ESG rules were unconstitutional would be a far greater hurdle for subsequent efforts by Missouri (and similarly-inclined states) to surmount if they engaged in subsequent anti-ESG legislation and regulation, rather than a single opinion by a federal district court.”
A Rejection of Improper State Intervention
The court’s decision adds yet another layer to the ongoing policy debates in states across the country on how to address ESG considerations in investment decisions and the financial services sector, as a whole. By declaring these regulations unconstitutional, the Missouri court is signaling a rejection of state government interventions in the investment strategies of financial institutions.
As practicing finance attorneys from Paul Hastings wrote in Law360 analyzing the broader implications of the District Court’s ruling:
“The Western District of Missouri’s order enjoining the rules comes amid other actions by state legislatures to revise or invalidate other anti-ESG legislation with similar disclosure and written consent requirements…Beyond disclosure requirements, the Western District of Missouri ruling may invite challenges to anti-ESG laws…”
Setting A Precedent Beyond Missouri
This ruling follows similar actions in other states, such as Kansas, Oklahoma, Wyoming, where other proposals putting restrictions on how financial institutions make investment decisions have been stalled by state officials, legislators and courts.
In Oklahoma, for example, a District Court permanently struck down the state’s ‘Energy Discriminiation Elimination Act,’ finding that the law’s “stated purpose of countering a ‘political agenda’ is contrary to the [Oklahoma Public Employee] retirement system’s constitutionally stated purpose,” and that “An attempt by the Treasurer or Board to divest or transfer funds for any purpose other than the benefit of the members or beneficiaries is contrary to and a violation of” the Oklahoma Constitution.
As more states consider similar legislation that targets how fiduciaries manage their customers’ assets, the decision out of the Show-Me State sets a precedent for future legal challenges and shapes the regulatory landscape surrounding investment practices across the country. It also serves as a warning to other states seeking to advance a political agenda by placing restrictions on financial institutions that will limit returns for savers, pensioners, retirees, and other investors.
Whether in a ‘red’ or ‘blue’ state, government policies that intervene in the operations of businesses have proven to be detrimental to all. At Americans for Free Markets, we support the ability of all companies – including financial institutions – to make the decisions that best serve consumers and maximize value for shareholders.
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