19 State Attorneys-General Participate in Investigation of ESG Ratings

Nineteen state attorneys-general have announced their participation in an investigation spearheaded by Missouri Attorney-General Eric Schmitt into the ESG ratings produced by Morningstar Inc. and its subsidiary, Sustainalytics, concerning allegations of consumer fraud or unfair trade practices.  (While certain participating states cannot be identified because of state policies or confidentiality laws, it is been reported that Arkansas, Georgia, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, Utah, and Virginia are among those that have joined the investigation.)  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 the attorneys-general reflect a wider scope of investigation (e.g., an interrogatory demanding "all documents ranking news sources or assessing their reliability for any of your ESG services"). 

This investigation is simply another example of the various ways in which conservative officeholders are seeking to push back against an apparent corporate adoption of ESG principles.  Investigations by state attorneys-general of alleged biases in ESG ratings in violation of state laws are simply another tool to employ.  And here, based on public reporting and an in-depth investigative report, there were apparently methodological issues sufficient to create cause for concern  ("[t]he Human Rights Radar Product . . . was found to have a latent, disproportionate focus on the Israeli/Palestinian conflict which results in biased outcomes disfavoring companies doing business in Israel. . . . Sustainalytics should substantially revise or eliminate the HRR product."). 

Broadly speaking, though, this effort by Republican attorneys-general reflects how ESG investing is rapidly 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 fuel 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 efforts by the SEC to promulgate climate change disclosures are being spearheaded by Democratic commissioners over the objections of their Republican colleagues.  This increasing partisan divide concerning ESG principles suggests that companies will soon be placed in the unfortunate position of navigating between irreconcilable state laws, and/or facing regulatory whiplash between administrations, as members of one party reverse the ESG-related actions taken by the other party.  These legal pressures are, of course, separate and apart from the various competing stakeholder interests that also seek companies to articulate positions on various issues implicating ESG principles.