Louisiana and Indiana Attorneys General Issue Guidance That Investment Firms That Incorporate ESG Factors Violate Their Fiduciary Duty

Recently, the Attorney General of Louisiana and the Attorney General of Indiana issued legal guidelines that the consideration of ESG factors by investment firms would likely violate, in the absence of full disclosure, the fiduciary duty of these investment firms towards their investors. In other words, these attorneys general are effectively saying that if investment firms consider ESG factors when making investments – as many of the larger asset managers are beginning to do – then these investment firms investment would be subject to legal liability under state law.

It is the latest tactic being deployed by conservative politicians trying to counter the recent trend by corporate America – including some of the biggest and most important asset managers and investment firms – to demand that companies take into account ESG factors and provide information on the role of ESG issues in corporate decision-making. This represents a significant escalation from the last action taken by these two AGs (and seventeen other state AGs) when they announced a rating agency investigation into Allegedly flawed ESG ratings. Such a strategy also exerts additional pressure beyond recent actions by state legislatures to compel state pension funds and similar public entities to boycott financial companies that are supposed to use ESG factors to refrain from investing in certain sectors. Now these attorneys general are virtually inviting plaintiffs to bring civil lawsuits against investment firms that consider ESG factors when making investments — when the firms fail to disclose that they do.

Notably, even though the efforts of these attorneys general are focused on state law enforcement, the guidance of these guidelines runs counter to recent federal rulemaking, including by the SEC, which seeks encourage additional consideration of ESG factors by company boards. . It is also possible that this issue could be addressed by the deployment of adequate disclosures by investment firms sufficient to satisfy applicable state law; however, it is likely that there would still be disputes over whether this disclosure regarding the use of ESG factors was indeed sufficient.

[I]Investment firms that operate as registered investment advisers in Louisiana and that use ESG factors or criteria without fully disclosing them to their client-investors, may violate their fiduciary duties imposed by Louisiana law. In Louisiana, such investor-clients include entities such as the Louisiana Treasury and the Louisiana State Retirement Boards (La. RS 11:262), including the Louisiana State Employees Retirement System (“LASERS”).