State anti-ESG laws create confusion when language is unclear

As part of maintaining our state ESG tracking database and map, we focus closely on the terms various states have used to impose restrictions on permissible investment considerations. While the terms and their meanings can vary from state to state, one constant is that they tend to leave room for interpretation and potential confusion. 

Rob Kozlowski at Pensions & Investments flagged an excellent example of the problems this ambiguity can cause involving a Florida hospital system's pension plan. In response to new state law, the plan is in the process of reevaluating its historic choice of a broadly diversified equity index fund that excludes tobacco. Under long standing DOL principles (which states have traditionally patterned their behavior on), a plan sponsor should be accorded deference for a choice like this as long as the fund is chosen based on its fit as an investment for the plan. Arguably, focusing on whether to use this fund based solely on the new law is a poor use of the plan's resources which could have been avoided if the state issued clarifying guidance on exactly what types of considerations are meant to be in scope for restrictions. 

We saw a similar dynamic play out under the Trump administration DOL's ESG rule (which Florida used as a model for key terms like "pecuniary factors"), and these vocabulary issues were only resolved there by eliminating the unclear terms and reestablishing the more traditional focus on neutrality in investing by fiduciaries.  All parties benefit when states are clear and crisp about the scope of investment restrictions, especially when those restrictions can represent a shift from historic practice.