Energy & Environment
State Legislators Work to Address Plastics Via “Advanced Recycling”
November 1, 2023 | Matt Crawley
October 31, 2023 | Townsend Brown
This article is part of our latest series: Major Issue Trends in 2023: State Legislative Recap. In this series, our experts examine the high-level legislative trends they saw in the 2023 state sessions. In addition to discussing the most prevalent issues considered by state policymakers, they explore some of the more surprising emerging trends we noticed, plus what to expect in 2024 for many of these policy areas. The series will be released during November and December, with new articles each week. Explore the full series here, and be sure to sign up for our email list so you don’t miss out on any articles (check the “Blog Posts” box).
The term “ESG” (which stands for environmental, social, governance), in all of its various meanings and applications, has cemented itself as a premier issue for state and federal lawmakers alike. The term is naturally open-ended, but a close inspection of legislation from 2023 and the year prior shows us that there are two primary categories that ESG legislation typically falls into. The first, and the most common form, relates to its use in financial investments and business decisions. The second group of ESG legislation is primarily concerned with mandating corporate disclosures and facilitating transparency around issues like corporate greenhouse gas emissions, workforce diversity, gender equality, fair pay, and ethical supply chains.
Lawmakers in 46 states introduced bills related to ESG investments in 2023. The reason the issue was so widespread this year is that Republican lawmakers across the country are pushing back against progressive ESG policies with their own brand of “anti-ESG” regulations. A close inspection of bills shows that Republican states have had much more success in actually enacting anti-ESG legislation than Democratic states have in enacting traditional ESG legislation in 2023.
For example, Florida lawmakers enacted a law (FL HB 3) to require the state’s Chief Financial Officer to make investment decisions based solely on pecuniary factors and disallow the consideration of any social, political, or ideological interests when making investment decisions. Similar anti-ESG bills were also passed in Alabama, Arkansas, Indiana, Kansas, Missouri, Montana, North Carolina, New Hampshire, Texas, and Utah.
On the opposite side of the issue, lawmakers in Illinois this year were successful in passing one of the most impactful ESG investing bills to date. The new law (IL HB 2782) establishes that every investment manager who manages public funds in the state (including pensions) must comply with new disclosure rules that require the investment manager to prudently integrate sustainability factors into their investment decision-making, investment analysis, portfolio construction, due diligence, and investment ownership. The new law in Illinois is in direct opposition to the new law mentioned above in Florida.
Comparing the Illinois and Florida laws highlights a common philosophical disagreement related to ESG. On one side, there is the argument that companies and investment/pension funds should work only to maximize returns. On the other, there is the argument that there should be consideration given to the interests of a wider range of stakeholders and potential outcomes when making investment decisions. As a result, partisan politics in the states are creating new laws resulting in an uneven regulatory landscape. Investors and businesses increasingly face a choice between complying with these new state laws and achieving the ESG goals promised to their investors and stakeholders. New anti-ESG laws in 2023 present significant uncertainty for an increasing range of businesses.
The second group of ESG laws comes in the form of mandated corporate disclosures. While these bills are not quite as widespread as ESG investing laws, the policies they hold carry immense significance for businesses everywhere. Progressive lawmakers so far this year have been unsuccessful in enacting any of their key ESG disclosure policies. Both New York and Washington were (again) unsuccessful in moving what is known as the New York Fashion Act. If enacted, the bill would require fashion sellers and fashion manufacturers to effectively carry out human rights and environmental due diligence for the portions of their business related to wearing apparel or footwear. The bill would also require companies to map out their entire supply chain and include disclosure for all four tiers of production.
Some of the most important developments within this space happened recently. Lawmakers in California passed a monumental bill known as the “Climate Corporate Data Accountability Act” (CA SB 253) in mid-September. The same bill narrowly died last August by a single vote in the final hours of session. If signed into law, the bill goes even further than the SEC’s proposed climate rules pending at the federal level. California’s bill would require corporations and other businesses with over $1 billion in annual revenue to provide public disclosure of emissions data on an emissions registry website. The disclosure must include comprehensive data related to a company’s scope 1, 2, and 3 greenhouse gas emissions and would apply to both public and private companies (here is an explanation of scope 1, 2, and 3 emissions). Reporting requirements for the SEC’s proposed climate rules would only apply to a company's scope 1 and 2 emissions, not the more difficult-to-track scope 3 emissions that will be required under California’s law. The SEC rule would also only apply to publicly traded companies.
If signed into law by Governor Newsom, the legislation would reflect a major win for proponents of ESG policies. The California Legislature has until September 14 to pass the bill. Read more about California's ESG legislation here.
2023 exposed some of the challenges of corporate social responsibility for public-facing brands. Several well-known American brands came under intense public scrutiny for marketing campaigns featuring LGBTQ+ materials and personalities. Consumers who didn’t agree with these campaigns boycotted purchasing, which can result in real financial impacts for companies.
With increasing political polarization, American brands find themselves in a difficult situation. Progressives want companies to embrace and display their progressive ideals while conservatives, particularly in rural areas, don’t want corporations taking political stances, particularly on issues to which they may be ideologically opposed. Moving forward, businesses throughout the country are likely to be more careful about their public perception. Companies may choose to take a more neutral approach in the future on certain issues, so as not to alienate the customer base on either side of the political aisle.
As we look around the corner to 2024, it’s important to remember that state sessions will play out in the background of what is likely to be a hotly contested and politically volatile presidential election. We should expect the political rhetoric at the federal level to have some effect on the politics at the state level.
There is no issue that reflects polarization more obviously than ESG legislation in the states. Conservative and liberal lawmakers have fundamental philosophical differences in how they view ESG legislation. In an already polarized environment, we are likely to see both parties double down on their political agendas throughout the states. Some ambitious lawmakers may even be looking to make a splash with news-grabbing legislation during an election year. For better or for worse, next year's presidential election will likely be fueled by social and cultural politics. Knowing this, we should expect to see another year with a large volume of pro- and anti-ESG legislation introduced throughout the country.
Another important development within the ESG space next year will be the release of the SEC’s finalized climate change disclosure rule. Expected to be released in October 2023, the new revised rule will be released a full 18 months after its initial proposal in March 2022. While this delay is unsurprising given the complexities of the proposed rule, and the immense amount of public engagement (both for and against), the delay creates additional difficulties for regulated entities due to the longer period of uncertainty as to what will and will not ultimately be included in the final SEC rule.
As a result of the released SEC rule, we may see Republican-controlled states introduce legislation to contradict the federal rule. On the flip side, Democratic-controlled states will likely propose legislation that goes beyond the requirements of the SEC rule, as we have already seen in California with SB 253. That same California bill was also introduced in New York this year (NY SB 897). If enacted, it remains to be seen how exactly California’s bill will interact with the federal rules but the idea that large corporations need to be transparent about their greenhouse gas emissions and environmental pollution is not a progressive policy that will fade away soon.
Finally, watch out for pioneering states with Democratic trifectas to be the most likely states to actually enact novel ESG legislation next year. States like California, Colorado, Washington, New York, Minnesota, and Massachusetts represent some of the most likely candidates to implement new ESG rules related to both financial investments and mandated corporate disclosures.
MultiState’s team is actively identifying and tracking ESG issues so that businesses and organizations have the information they need to navigate and effectively engage with emerging laws and regulations. If your organization would like to further track ESG or other related environmental issues, please contact us.
November 1, 2023 | Matt Crawley
October 31, 2023 | Matt Crawley
October 31, 2023 | David Shonerd