An Oklahoma lawsuit may be the first to challenge the arguments against anti-ESG state laws, claiming they are confusing to implement and will financially harm public pensioners.
Oklahoma has enacted a law requiring governmental entities to divest from companies deemed to boycott the oil and gas industry, joining states like Texas and Kentucky. A lawsuit filed in state court portrays the 2022 Oklahoma law as subjective.
Some state officials are seeking clarifications in the GOP-controlled legislature on the measure due to differing interpretations of the law.
Court and legislative developments in Oklahoma early next year could influence how other states consider such anti-boycott bills. Measures filed in Missouri and Wisconsin propose similar policies, though those bills take varying approaches to how penalized companies are identified.
The measures are part of a broader push in Republican-led states to limit how companies consider environmental, social, and governance factors—such as addressing climate change—in their investing and business decisions. State actions have increasingly put a bull’s-eye on Wall Street. For example, Tennessee on Monday sued BlackRock Inc., a frequent target of GOP officials, for allegations related to the investment firm’s ESG strategy.
In Oklahoma, the litigation could impact other states with anti-ESG laws. Depending on the how the case proceeds, states elsewhere could face similar legal arguments or proactively shore up their laws against challenges, said Josh Lichtenstein, ERISA and benefits partner and head of the ERISA fiduciary practice at Ropes & Gray LLP.
“To the extent that there is a successful lawsuit that could actually limit these actions, I would expect to see a ripple effect across states,” he said.
Clarification Needed
Oklahoma’s Energy Discrimination Elimination Act, which took effect Nov. 1, 2022, empowers elected Treasurer Todd Russ (R) to create and maintain a list of financial companies that he determines boycott energy companies based on publicly available information as well as his office’s communications with the company.
Russ released his first list of restricted companies in May and a revised list in August. Governmental entities such as state pension systems must divest from those companies, though the law provides exemptions if complying with the law would violate their fiduciary duties.
Russ and pension system trustees have since disagreed on when to use that exemption, while local government officials have also raised concerns about the impact of the law.
“There’s a sense in which, although Oklahoma was not really a first mover in this area, they have progressed rapidly and thereby reached a point where these real questions about potential losses due to divestment have come to a head more rapidly,” Lichtenstein said.
Pension systems have generally been amending their investment policies and analyzing and acting on what qualifies for divestment, said Marc Edwards, general counsel for several pension systems in Oklahoma. There have been a number of questions throughout the process, he said, such as why the treasurer put certain companies on the list and when to take the law’s fiduciary exemption.
“If I were in the legislature, I would want to give a clearer picture of how do you challenge the treasurer’s placement of a company on his list,” Edwards said. “It’s fairly arbitrary.”
Russ has largely defended the law he’s implementing. He said the statute is “clear enough to know the spirit and the intent of the law and the legislature to watch over Oklahomans and the economic engines that help drive our state.” Parts of the law, though, could use clarification in the legislature, such as when to apply exemptions, he said.
“I think I know what it means,” Russ said. “But some are saying that they don’t read it the same way I do and therefore they feel like they can just claim just a general ‘Well, based on my fiduciary responsibility, I’m not enforcing it.’”
Russ said his own office has taken exemptions outlined in the law that allow contracting with restricted companies if the services aren’t otherwise reasonably available. The office still uses JPMorgan Chase & Co. and Bank of America, which are on his restricted list, for banking and credit card services. He said working with the processing side of the banks “is totally, totally different from the investment portfolios side of the business” and cited a lack of alternatives to the companies.
“We serve a wide range of clients in the oil and gas industry, including many in Oklahoma,” Bank of America spokesperson Bill Halldin said in an email.
A JPMorgan spokesperson said the company provided 40 Oklahoma companies in the oil and gas industry with over $2 billion in financing and other services between 2021 and 2022 and is one of the world’s largest financiers of fossil fuels and cleaner energy sources.
‘Political Warfare’
Confusion over the law is cited in the legal challenge brought by a retired public employee who alleges that pension funds are being used for “political warfare” in violation of the Oklahoma Constitution. The suit filed in the District Court of Oklahoma County seeks a temporary injunction against the law.
The lawsuit was first filed in November. A new case was filed on Thursday to address a dispute over whether it should be heard in state or federal court.
Lawsuit backers aren’t making a statement in favor of ESG investing, said Tony Hutchison, executive director of Keep Oklahoma’s Promises, a group that represents public employees and is supporting the legal challenge. Instead, they want pension system decisions to be made objectively and devoid of politics, he said.
“The money belongs to the pensioners,” Hutchison said.
Other state anti-ESG laws have also “ended up being quite vague and difficult to interpret,” said Leah Malone, partner and head of the ESG and sustainability practice at Simpson Thacher & Bartlett LLP. Terms such as ESG or what constitutes an “ordinary business purpose” don’t necessarily have an accepted meaning.
“This is part of why this suit filed in Oklahoma is so important, because often in the legal system, laws are passed by legislatures, or actions are taken. And it’s really not until we see a legal challenge that the interested parties can really understand how the laws are supposed to be implemented,” Malone said.