The E.S.G. Fight Has Come to This: Bankers Suing Lawyers

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Kentucky passed a law targeting banks and their climate policies. Bankers sued the attorney general. Whose definition of investment risk should prevail?

Bow-tied bankers do not often sue a state’s lawyer in chief. So when it does happen, it’s time to pop the popcorn and gather around to watch.

In October, Kentucky’s attorney general ordered some of the nation’s biggest banks and investment firms to turn over piles of documents that had the word “climate” or “environmental” in them. The bankers went to court to fight him.

Like a growing number of states, Kentucky has a new type of law on the books targeting financial institutions that “boycott” companies that don’t get past some kind of an E.S.G. screening. What the states mean by boycott isn’t always clear.

E.S.G. — which refers to environmental, social and governance standards — has become a point of contention for red-state legislators defending the fossil fuel industries that employ their residents.

There’s just one problem with this fledgling anti-E.S.G. movement: To act and invest in a state’s best interest ought to mean taking every risk into account, including climate change. And lawsuits like the one in Kentucky are a reminder of the fact that few of us have a good grip on how to properly define risk.

Our Bluegrass State tale begins with a bill that Kentucky legislators passed last year. The legislation ordered the state treasurer to keep a list of financial firms that “have engaged in energy company boycotts.” If those firms don’t respond appropriately to warnings, state governmental entities can, in most instances, no longer own the firms’ securities. Moreover, state entities can’t do business with those financial firms in most instances, either.

The banks were wary enough about all of this. But then, seemingly out of nowhere, Daniel Cameron, the state attorney general, got involved.

In October, he issued subpoenas and civil investigative demands. He targeted Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. His office announced that it planned to examine “documents relating to the companies’ involvement with the United Nations’ Net-Zero Banking Alliance.” The information requested, the office said, “centers on suspected financial discrimination against companies that do not align with the United Nations’ ‘net-zero’ climate agenda.”

In response, the Kentucky Bankers Association sued, calling the attorney general’s 24 demands for information and 20 separate demands for documents an “amazing” overreach.

In effect, according to the bankers’ legal filing, the demands were “creating an ongoing state surveillance system.” The bankers further claimed that the attorney general was violating their right to free speech and freedom to associate.

It would be easy to dismiss this mudslinging as a kind of political sideshow. No one close to this — literally nobody — wanted to have a substantive conversation about the investing principles at issue.

The roster of no-commenters included not just the bankers and the state attorney general but also the state treasurer and endowment managers at the University of Kentucky and the University of Louisville, both public institutions.

The Kentucky bill does contain a loophole. The legislators, knowing that they shouldn’t force state employees to violate their duty to act in the best interest of constituents, gave those employees a kind of waiver. And on Feb. 13, Betty Pendergrass of the County Employees Retirement System sent the state treasurer, Allison Ball, a matter-of-fact note letting her know that she’d be exercising that fiduciary duty.

Does Ms. Ball sue Ms. Pendergrass now?

In the meantime, it is possible that a judge will side with Mr. Cameron, the attorney general, in his fight with the bankers association. “When you try to stop an investigation, the courts aren’t usually very amenable to that,” said Russell Weaver, a professor at the Louis D. Brandeis School of Law at the University of Louisville.

Mr. Cameron, a Republican, just so happens to be running for governor. But it is his partner in enforcement, Ms. Ball, who accuses the other side of playing politics, even as she issues pronouncements that read like something from a candidate.In a news release this year, Ms. Ball’s office said she had long fought E.S.G. “schemes” that “prioritize political goals above financial returns.”

But as the law and its loophole allow, it is those very investment returns, and the proper stewardship of state money generally, that are of primary concern when you are a government employee who is duty bound to act in the best interest of the people you serve. Any process that supports such actions is well worth enacting.

So what is E.S.G., anyway? As investors rename their firms and their funds in a race to ride the E.S.G. wave, cynics see the debate over the term’s definition as degenerating into everyone seeing gibberish. Because funds can define E.S.G. nearly any way they want, they have come to resemble an extra-strange goulash. Sometimes, these new or newly rebranded operations are just elegantly simple greenwashing and nothing more.

To prudent portfolio stewards of everything from retirement investments to housing — that’s you, I hope, and me — an E.S.G. filter is simply good risk management, just as looking at international economic or demographic trends can be. Keeping an eye on how climate change may affect a stock holding (or the place for a retirement home), or whether a board is made up mainly of white men from fancy colleges, is part of what anyone should consider when picking stocks.

In other red states, this way of thinking is catching on. This month, the Indiana Chamber of Commerce, which is not in the habit of selling itself as a nerve center of wokeitude, tweeted out its “strong opposition” to a proposed anti-E.S.G. bill there.

Then there was the fledgling bill in North Dakota. In January, as the trade publication Pensions & Investments recounted, Lisa Kruse, the commissioner of the state’s Department of Financial Institutions, said the proposed bank ban there would be unfair.

“There does not appear to be any legal checks and balances or appeals processes within this bill,” she said.

On Feb. 1, legislators took a vote. They rejected the bill, 90 to 3.

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