Florida's new law makes ESG murkier

A measure signed into law this week in Florida revolves around a vague term that discourages ESG factors from being considered by those managing public assets: pecuniary.

That new law, "Government and Corporate Activism," makes permanent the restrictions on environmental, social and governance considerations recently put in place by Gov. Ron DeSantis, who signed the bill Tuesday.

Although the law doesn't appear to go as far as some other states’ restrictions on ESG, it can still be considered the most significant, observers say.

“What’s striking about the law is its breadth — the sheer number of restrictions it imposes and the range of actors it applies to,” Leah Malone, leader of Simpson Thacher’s ESG and sustainability practice, said in an email statement. “In many cases, the specific restrictions are similar to those passed by other states and are not actually the most stringent we’ve seen. But collectively they constitute the most sweeping law targeting consideration of ESG factors in investment decisions.”

The law also establishes “a new playbook” for other states, including the group of 17 other Republican governors who signed onto an anti-ESG alliance led by Florida, Malone noted. The biggest impact of the new law will be on state and local bond provisions, proxy voting and reporting, Malone said. A paper issued Tuesday by Simpson Thacher highlights differences between the Florida law and numerous ESG policies in other states, noting that it is "the farthest-reaching anti-ESG law to date."

The law states that investment considerations are limited to pecuniary factors, which it defines as being “expected to have a material effect on the risk or returns of an investment based on appropriate investment horizons consistent with applicable investment objectives and funding policy” and excludes “the consideration of the furtherance of any social, political or ideological interests.”

The term “pecuniary” started becoming much more common in investing parlance when the word surfaced as a cornerstone of ESG regulations published by the Department of Labor under former Secretary Eugene Scalia during the waning days of the Trump administration.

Complicating that term’s application for ESG factors is that such criteria can be material. Further, “ESG” has taken on various meanings as well.

“That term has gotten manipulated all over the place — it means a host of different things,” said Jill Fisch, professor of business law at the University of Pennsylvania Law School. “It’s a big category. There are a lot of things in the ESG bucket that are clearly financially material.”

One sign of the importance of those factors from a risk and return perspective is their use by hedge funds, she said.

“A lot of the big hedge funds now have explicit personnel dedicated to ESG issues,” Fisch said. Hedge funds are clearly focused on financial returns, and “by and large, they’re not out to save the world.”

But asset managers have also been relatively conservative in how they consider ESG, she noted.

That could be in part because there's a lack of consensus in empirical studies to show ties between certain ESG factors and economic value, Fisch said. But “the fact that they’re inconclusive doesn’t mean there’s not an economic relationship.”

That can be the case with arguments about the benefits of diversity within corporate boards, as “diversity,” while important in its own right, has many dimensions, she said.

Also making things murky are environmental practices that can look good on paper for a company — such as an oil company selling its most polluting assets — but have a net negative effect on the earth, she noted.

Interestingly, DeSantis signed the bill into law the day after the Florida State Board of Administration indicated a $200 million commitment to an alternative energy fund focused on clean energy, said Bryan McGannon, acting CEO at US SIF: The Forum for Sustainable and Responsible Investment. News of that commitment was reported this week by Pensions & Investments.

“Investment managers should be allowed to consider all factors in their investment decision-making, including ESG factors,” McGannon said. “Politicians don’t make good investment managers.”

Projections about the impacts of anti-ESG measures in other Republican-led states have shown likely cost increases and general investment restrictions, he noted.

A consequence of the law will be more confusion around what might be considered material.

“This legislation does not change the fact that investors find factors related to climate risks or corporate governance failures material to the value of their investments — it just undermines their freedom to consider those factors,” Greg Hershman, head of U.S. policy at Principals for Responsible Investment, said in a statement. “The bill’s vague language related to ‘pecuniary’ factors simply creates more ambiguity when there’s a desire for greater clarity.”