Dive Brief:

• A coalition of 17 Democratic state finance officials sent a letter to the acting heads of the Securities and Exchange Commission and Department of Labor Wednesday, combating anti-ESG and anti-DEI claims from their Republican colleagues that were previously sent to the agencies, according to the letter seen by ESG Dive.
• The Democrat-led letter comes a few weeks after a coalition of Republican state finance officials sent their own letter to the SEC and DOL, urging them to promulgate regulations that prohibit the use of environmental, social and governance factors or diversity, equity and inclusion goals. The group of Democratic officials said it believed it was “critical to rebut [the prior letter’s] assertions.”
• “We urge the SEC and DOL to uphold their commitment to protecting the ability of fiduciaries to exercise their professional judgment in assessing long-term financial risks,” the Feb. 19 letter said. “Efforts to politicize investment management and restrict fiduciary discretion threaten the financial security of millions of retirees.”

Dive Insight:

The Democratic finance officials took particular issue with the Republican officials’ letter relying heavily on a federal judge’s ruling against American Airlines in a lawsuit over the management of its retirement plans. The Republican finance officials used U.S. District Court judge Reed O’Connor’s ruling as evidence that the incorporation of factors like ESG is being used to pursue non-pecuniary goals.

The officials included state auditors, treasurers, controllers and comptrollers from New York City, California, Illinois and 12 other states who said that such a characterization of the use of environmental, social and governance factors is “incorrect and dangerously misleading.” 

“The decision in Spence v. American Airlines, which dismissed long-term financial interests as a ‘mere pretext,’ fails to reflect the fundamental reality of long-term investing,” the Democratic officials wrote. “Fiduciaries are not speculators — they are stewards of trillions of dollars in assets that must sustain retirees for decades.”

Officials from Connecticut, Colorado, Delaware, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, Oregon, Rhode Island, Vermont and Washington also signed onto the letter. They said that risks related to climate change, governance failures and systemic issues are “present-day financial realities affecting market valuations, insurance costs, supply chains and infrastructure resilience."

The Republican officials had said in their Jan. 28 letter that they held “serious concerns” that funds were being used to advance ESG or DEI goals and asked for rulemaking to prohibit plans from using assets to “advance political or social goals.” They also asked the Labor Department and SEC to issue comprehensive guidance explicitly saying that making investment decisions or proxy votes based on ESG or diversity, equity and inclusion objectives is “inconsistent with fiduciary duties.” 

Connecticut State Treasurer Erick Russell called the request a “dangerous political proposal” in emailed comments to ESG Dive Wednesday, while Illinois State Treasurer Michael Frerichs went a step further, calling the approach “Orwellian” and “a reckless attempt to put politics ahead of sound financial decision-making” in comments Wednesday.

“Forbidding investment managers from assessing real-world risks — whether they stem from supply chain disruptions, environmental instability, shifting consumer demand, or any other factor — would restrict their ability to fully analyze investment opportunities and inherently runs counter to that fiduciary responsibility,” Russell said.

The blue state fiduciaries warned that if utilizing ESG factors in investment decisions was banned for fiduciaries, it could cause weaker investment performance, create greater exposure to market volatility and increase financial vulnerability for retirees.

“As stewards of public funds, we have a responsibility to ensure that our investments provide stable, long-term returns over periods of decades,” Delaware State Treasurer Colleen Davis told ESG Dive. “It is morally reprehensible and financially negligent to play politics with the American people’s retirement savings and investments.”

Acting SEC Chair Mark Uyeda and Acting Labor Secretary Vince Micone are currently in charge of two agencies who are defending a pair of ESG-linked regulations in court. Uyeda said last week he would seek a delay in arguments in lawsuits about the SEC’s climate-risk disclosure rule, indicating the agency as constructed is not inclined to defend the rule. A federal judge recently ruled in favor of the Biden administration’s Labor Department on its regulation allowing fiduciaries to consider ESG and other collateral benefits in the case of a tiebreaker. Experts expect that both rules are endangered under this Trump administration.