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19 State Attorneys-General Participate In Investigation Of ESG Ratings – Corporate Governance

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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

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
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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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