Oklahoma ruling could undermine anti-ESG laws in Southeast, attorneys say

An Oklahoma court ruling against a state anti-ESG law could help undermine similar laws in Louisiana, Florida, and elsewhere, attorneys said.

Oklahoma County District Court District Judge Sheila Stinson late last week issued a permanent injunction against the enforcement of a 2022 state law that led to investment banks being banned from underwriting municipal bonds and the targeting of other financial firms for divestment purposes. She earlier issued a temporary injunction.

Barclays, Bank of America, JP Morgan Chase, Wells Fargo, BlackRock, State Street Corp., and Climate First Bank were placed on the boycotters list by state Treasurer Todd Russ because of their alleged hostility to the oil and gas industries.

In the aftermath of the Oklahoma decision, "other states' statutes that use public pension funds as a political tool to protect favored industries should be open to similar challenges, as most states have mandates that pensions must be managed solely in the interests of retirees," said Ropes & Gray Partner Robert Skinner.

Attorneys Leah Malone and Emily Holland had opined before the permanent injunction, "If the law is ultimately vacated, the decision could lead to similar action in other states.

"At least seven states (Arkansas, Idaho, Kentucky, Louisiana, Texas, West Virginia and Wyoming)" have similar laws that stop those states from doing "business with companies that 'boycott' or 'discriminate' against certain industries considered antithetical to the ESG movement," they wrote in Harvard Law School's Forum on Corporate Governance.

Neal Pandozzi, partner at Bowditch & Dewey, noted the specifics were unique to Oklahoma, but could serve as "persuasive authority" in other states, particularly if litigants carefully adapt the winning argument to the facts of the case and laws of the state.

The decision is "certainly helpful" to challengers in other states, he said.

Pandozzi noted Russ said he will appeal the decision.

Even if the decision is overturned, Pandozzi said, the arguments could be a play book in other cases in other states.

"It's difficult to predict how other cases may play out, but it's valuable to see a court recognizing that these anti-ESG laws have real costs for retirees and pension plans," said Elizabeth Derbes, director of financial regulation and climate risk at Natural Resources Defense Council.

While Stinson's written decision has yet to be released, based on her oral ruling and the May preliminary injunction it appears she believes the law's wording is vague and is contrary to the state's constitution.

Additionally, the judge believes, the law's effort to counter a political agenda violates the constitutional requirement that income for the state's retirement system is to be used exclusively to support the system. "The court finds a substantial likelihood that [the law's] stated purpose of countering a 'political agenda' is contrary to the retirement system's constitutionally stated purpose," Stinson wrote.

"The Oklahoma statute, like similar statutes in other states, is based on a fundamentally false premise: that asset managers who incorporated climate-related risks into their investment process are punishing energy companies in pursuit of a political or social agenda, rather than seeking to maximize investment returns for retirees," Ropes & Gray's Skinner said. "The Oklahoma court's decision reflects the fact that just the opposite is true. In reality, the legislature is furthering its own political agenda at the expense of retiree benefits."

While Stinson didn't address this in the preliminary injunction, the law lifted municipalities' borrowing costs by an average 59 basis points, according to a study from the University of Central Oklahoma's Economics Department.

The Oklahoma lawsuit's successful attack on the 2022 law could be used in other states, Malone and Holland said. Most of the other states, "use terms similar or identical to the terms highlighted by the Oklahoma court for their vagueness. In addition, the same exclusive purpose argument used against the Oklahoma law [that the state pension funds should only be used for pension fund recipient benefit] could be levied against other state anti-boycott laws."

In June, Louisiana's government passed a law prohibiting the state and local governments from doing business with companies said to discriminate against the gun industry. "If this law were used as a tool to steer public pension funds away from managers based on their views on firearms — rather than based on the financial returns they deliver to retirees — the Oklahoma reasoning would be directly on point," Skinner said.

The Louisiana Department of Treasury told The Bond Buyer while it hasn't had the opportunity to review Oklahoma's decision, "we do not believe it will impact our state."

"Our position has remained consistent," the spokesperson said. "We oppose doing business with banks and financial entities that discriminate based on political viewpoints, including discrimination against those who sell or manufacture firearms."

In May, a group in South Florida filed a lawsuit against Palm Beach County Clerk and Comptroller Joseph Abruzzo that cited a law Florida's Republican government passed in 2023, which bars local governments from considering non-pecuniary factors in their investment decisions. Break the Bonds South Florida opposes the war in Gaza, which began when Hamas terrorists murdered more than 1,200 Israelis in an attack on October 7, and Abruzzo's purchase of $700 million of Israel bonds since October.

Florida House Bill 3 was aimed at ending the practice of "placing politics above the fiduciary duty to make the best financial decisions for beneficiaries" in the words of Florida Gov. Ron DeSantis.

However, other parts of this law barred Florida municipal issuers from selling bonds with ESG labels or from paying firms that certify bonds' green status.

An organizer with the Break the Bonds group said she was waiting for Abruzzo's court response but didn't believe the Oklahoma decision will play a role in their case.

In February, South Carolina passed an "ESG Pension Protection Act," which requires the state pension fund's investment decisions be based on maximizing returns.

Despite legislation in the Southeast, the Oklahoma decision may be part of a larger retreat for the anti-ESG movement, Malone and Holland said in their article earlier this month. "This year has shown a declining trend of successful anti-ESG lawmaking as the state level. As most state legislatures' sessions draw to a close, fewer than 10 anti-ESG bills have been passed this year, although close to 100 bills and resolutions were introduced in 2024, with the vast majority failing to advance."