Missouri Judge Strikes Down ESG Investment Rule

(This Aug. 14 story has been corrected to reflect that the Missouri Attorney General’s office is not involved in the case, in paragraph 6)

By Daniel Wiessner

(Reuters) – A federal judge in Missouri struck down on Wednesday the Republican-led state’s rule limiting the ability of financial professionals to consider Environmental, Social, and Corporate Governance (ESG) factors in investment advice.

U.S. District Judge Stephen Bough in Kansas City agreed with a trade group, the Securities Industry and Financial Markets Association (SIFMA), that the 2023 rule was invalid because it imposed requirements on investment banks and broker-dealers that do not exist in federal law.

The rule, issued by Missouri Secretary of State Jay Ashcroft, would require investment advisers who consider ESG objectives, such as combating climate change or supporting social movements, to disclose them to customers and obtain their consent.

Bough stated that, besides conflicting with federal law, Missouri’s rule violated the free-speech rights of investment advisers and was too vague to be enforced under the U.S. Constitution.

State officials “could have embarked on a public-information campaign to advance their desired message,” wrote Judge Bough, an appointee of former Democratic President Barack Obama.

Ashcroft’s office hired private counsel to defend the rule, and the office of Missouri Attorney General Andrew Bailey, a Republican, is not involved in the case.

SIFMA CEO Kenneth Bentsen stated that Missouri’s rule was unnecessary and would disrupt the uniform nationwide regulation of the securities market guaranteed by federal law, which already requires financial professionals to act in their clients’ best interests.

“That means they cannot put their interests ahead of their customers’ interests when recommending securities,” Bentsen explained in a statement.

Missouri’s rule is part of a broader push by Republicans in some U.S. states to limit the growing consideration of ESG factors by businesses and investors, including employee retirement plans that collectively invest trillions of dollars.

The administration of former Republican President Donald Trump adopted a rule barring retirement plans from considering any “non-pecuniary” factors in investment decisions. The Biden administration eliminated that rule, a move currently being challenged in court.