19 State Attorneys General Participate in ESG Ratings Survey – Corporate Governance

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Nineteen state attorneys general have announced their participation in an investigation led by Missouri Attorney General Eric Schmitt into ESG ratings produced by Morningstar Inc. and its subsidiary, Sustainalytics, regarding allegations of consumer fraud or unfair trade practices. (Although some participating states cannot be identified due to state policies or privacy laws, it has been reported that Arkansas, Georgia, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, Utah, and Virginia are among those who have joined the survey.) Although the impetus for this investigation was an apparent conflict between state laws against the BDS movement (a Palestinian-led campaign for “boycott, divestment and sanctions” against Israel) and ESG ratings allegedly reflecting an anti-Israel bias , the documents sought by attorneys general reflect a broader scope of inquiry (e.g., an interview requiring “all documents classifying sources of information or assessing their reliability for any of your ESG services”).

This survey is just another example of the various ways conservative leaders are seeking to push back against apparent corporate adoption of ESG principles. Investigations by state attorneys general into alleged bias in ESG ratings in violation of state laws are just another tool to use. And here, based on public reports and extensive study investigation reportthere were apparently methodological problems sufficient to cause concern (“[t]e human rights radar product. . . was found to have a latent and disproportionate focus on the Israeli-Palestinian conflict, leading to biased results that disadvantage companies doing business in Israel. . . . Sustainalytics should significantly revise or phase out the HRR product. “).

Broadly speaking, however, this effort by Republican attorneys general reflects how quickly ESG investing is becoming a partisan issue. Red states are enacting laws designed to penalize companies that embrace ESG principles and refrain from providing capital to, for example, fossil fuels and extractive industries (https://insights.mintz.com/post/102hty2/ west-virginia-penalizes-major-companies-for-embracing-esg-principles; https://insights.mintz.com/post/102hvxz/texas-identifies-financial-companies-targeted-for-divestment-due-to- energy-boyco), and the SEC’s efforts to enact climate change disclosures are being led by the Democratic commissioners over the objections of their Republican colleagues. This growing partisan divide over ESG principles suggests that companies will soon be placed in the unfortunate position of navigating between irreconcilable state laws and/or facing a cross-jurisdictional regulatory whiplash, as one party members cancel ESG-related actions taken by the other party. . These legal pressures are, of course, separate and distinct from the various competing interests of stakeholders who are also asking companies to articulate their positions on various issues involving ESG principles.

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