Update (Aug. 10, 2023): This story has been updated to reflect a lawsuit filed by the Securities Industry and Financial Markets Association that challenges Secretary of State Jay Ashcroft’s rule regarding ESG investment practices in Missouri.
During the 2023 legislative session, Missouri lawmakers looked to follow the lead of other Republican-led states by curbing environmentally minded investing practices, which they disparaged as “woke.”
The attempt to ban state involvement with banks that prioritize climate action or other socially driven investments fell by the wayside. That failure came as a relief to groups as diverse as the Missouri Chamber of Commerce and the state’s Sierra Club chapter.
But now, Secretary of State Jay Ashcroft has used unusual powers of his office to create new restrictions around investing with a climate sustainability or social justice component and how banks can practice it.
Ashcroft says his rule is the first of its kind, placing Missouri on the cutting edge of how some states might think about regulating ESG, or “environmental, social and governance,” investing. The practice takes into account social concerns and personal beliefs.
Ashcroft is one of the few secretaries of state whose offices manage securities. After the General Assembly failed to pass any legislation related to reining in ESG practices, Ashcroft said, he used his authority to set the new rule.
But the business groups that opposed the legislature’s moves in the 2023 session voice the same objections to Ashcroft’s rule. They say it will create an unneeded burden on banks that operate in Missouri.
The rule, which took effect at the end of July, requires financial advisers and institutions to have clients sign disclosure forms when an investment may consider ESG scores or prioritize elements that may not yield maximum profit.
Ashcroft, a Republican running for governor, said his rule is directed at investors who are “going to make a discretionary trade recommendation, and that recommendation is wholly or in part based on something other than getting the maximum financial return. They need to disclose that and get approval,” he told The Beacon in an interview.
Ashcroft’s requirement was one of many restrictions on ESG investing that the legislature considered this year. According to a report published by Pleiades Strategy, a climate-focused research firm, Missouri Republicans introduced 13 anti-ESG bills in 2023. The bills were eventually funneled into one piece of legislation, HB 863.
Most of that bill focused on preventing discrimination against businesses or entities based on ESG scores — similar to the approach followed by a number of Republican-led states. It was passed in the House, but died in the Senate.
Ashcroft, who has called the legislative session “extremely dysfunctional,” has since rolled out his own measure.
Michael Berg, the political director for the Missouri chapter of the Sierra Club, called Ashcroft’s rule “anti-free market, anti-social responsibility and anti-environmental.”
“There’s no clamoring of Missourians to put these rules in place, and then the legislature saw these bills and rejected them,” Berg said. “It’s interesting. What is the motivation? Why is he pushing it?”
Howard Fischer, a former prosecutor for the federal Securities and Exchange Commission and now a partner at the New York law firm Moses Singer, said the movement against ESG practices first took hold in the South, where some states have a financial interest in the outcomes of the oil and gas industry.
“Part of this is cultural war. The other part is fossil fuel related,” Fischer said. “It’s not really about investment performance. It’s about staking out a position in the culture wars. And to the extent it is about finances, it’s about protecting local industries.”
At least 165 pieces of legislation were filed in 37 states to counter ESG investment practices, according to Pleiades Strategy. Of those, only 22 laws in 16 states were passed during 2023 legislative sessions.
Ashcroft said that while Missouri is taking a unique approach to regulating ESG practices, he believes the state could set the precedent for other secretaries of state who control securities with similar control over investment rules. He speculated that Wyoming, Mississippi and Georgia might follow Missouri’s lead.
Government v. business
Ashcroft said his rule gives people a choice of pursuing investments for maximum profit, or potentially compromising some of that profit to invest in companies that align with their values.
“We didn’t want to preclude people from being able to invest in anything, because once again, it’s their money,” he said.
But the state Chamber of Commerce says the language is vague and its attempts to address it with Ashcroft’s office seemed to go unheard.
“We’ve had pretty extensive conversations with the secretary of state’s office,” said Phillip Arnzen, head of governmental affairs for the chamber. “And they did a slight revision, but it did not address the concerns.”
“This rule, it’s so vague that you could look at it and almost every single transaction, you could say, theoretically, you’re going to need this consent form,” he said.
Fischer, the former SEC prosecutor, said part of the complication is that securities rules are most often set at the federal level. For financial institutions, which are typically risk-averse, Ashcroft’s rule could lead to higher fees and labor costs if disclosures are required on many transactions, or if they have different requirements to meet for different states.
“It’s a lot easier for firms to operate with a federal standard,” Fischer said. “It could mean putting additional expenses on companies’ backs.”
The Missouri Chamber of Commerce made the same criticism.
“This is more burdensome than federal regulations,” Arnzen said. “And then it puts Missouri in a different standard than every other state.”
The change caught the attention of the Securities Industry and Financial Markets Association, the trade association representing broker-dealers nationwide. The group filed a lawsuit in federal court challenging the rule, saying Missouri’s rules “directly conflict” with federal securities laws.
“Notably, the new Missouri rules fill no void or blind spot that would protect Missouri investors today,” the group wrote in an Aug. 10 news release announcing the lawsuit. “Under existing federal securities laws, broker-dealers and investment advisers are already required to provide investment advice that is in the best interest of their customers.
The rule, 15 CSR 30-51.170, requires written consent for ESG-related transactions either at the beginning of a person’s relationship with their financial adviser, when a broker is advising on a sale of a security or commodity, or when a broker is selecting a third party to manage the investments in someone’s account.
Ashcroft rejected criticism that the rule isn’t clear.
“Are they against telling people and disclosing how their money is going to be invested?” he said.
Missouri’s rulemaking approach is different from ESG restrictions in other states, Fischer said. In Texas, managers of public pension funds testified against a bill barring them from considering ESG criteria. They said it had the potential to cost the state $6 billion over the next 10 years. The bill did not pass.
Missouri’s rule doesn’t span that far.
“Missouri is taking a disclosure-based approach. You’re not supposed to do things without people knowing what you’re doing and making an informed decision, which is actually what an investment adviser is supposed to be doing,” Fischer said.
“It doesn’t actually change things as much as it could,” he added. “It is a significant difference from the more results-oriented approach that some other states have proposed.”
Fischer said that as the conversation surrounding ESG continues, states should consider the hindrances the policies could pose as businesses and states seek to adapt to a changing world.
“The blind spot of a lot of the anti-ESG programs that some state actors are promoting is that if you were telling companies that they cannot consider environmental factors in both investments and operational decisions, then you’re effectively saying that they are precluded from changing as the world changes,” he said. “That means that as the world changes, they are going to be damaged significantly, because they weren’t allowed to adapt to those changes before they happened.”
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