Florida Stepping Up Enforcement of Restrictive Anti-ESG Law; More Legislation Coming

In a video posted on X on January 31, 2024, Governor Ron DeSantis announced that Florida will begin enforcing violations of its anti-ESG legislation (House Bill 3, “An Act Relating to Government and Corporate Activism” (HB 3)) that was adopted last year. He asserts there are financial institutions that have signed attestations that say “they are not doing ESG or social credit scores” when in fact “they are doing things outside of what they attested to that would violate Florida law.” In his message, the Governor said that he has had discussions with members of the Florida Legislature about what actions can be taken against these institutions and that his administration will enforce the law, and he added that more legislation will be coming although he did not provide details. Following Governor DeSantis’s statement, it is important for all investment advisers that currently manage or are seeking to manage Florida public mandates to review their compliance approaches to HB 3.

The Florida legislation, which took effect on July 1, 2023 (see our prior Alert for additional details), imposes unique and challenging rules and restrictions for asset managers. Under the law, any manager that invests Florida public funds must make investment decisions based solely on “pecuniary factors.” A pecuniary factor is defined as one that is expected to have a material effect on the risk or returns of an investment based on appropriate investment horizons consistent with applicable investment objectives and funding policy and that does not include the consideration of “social, political, or ideological interests.” This definition may be understood to reflect skepticism about the ability for ESG factors to have a material financial impact on investments, although HB 3 does not define “social, political, or ideological interests.” This is similar to the U.S. Department of Labor’s ESG final rule for ERISA plans that the Trump administration adopted in 2020 (see our prior Alert), which the agency later found to have a “chilling effect” on investment decisions that may include ESG factors even when they are relevant to a risk-return analysis.

In addition, HB 3 has a unique “stickering” provision, which requires investment managers to include a disclaimer in any external written communication with a company in which the investment manager has invested Florida public funds if the communication:

• discusses social, political, or ideological interests,
• subordinates the interests of the company’s shareholders to the interests of another entity, or
• advocates for an entity other than the company’s shareholders.

The disclaimer must state: “The views and opinions expressed in this communication are those of the sender and do not necessarily reflect the views and opinions of the people of the state of Florida.” This requirement applies to all contracts between a Florida governmental entity and an investment manager that have been executed, amended or renewed on or after July 1, 2023. The governmental entity has the unilateral right to terminate any contract with a manager if this disclaimer is not included.

Furthermore, investment managers are required to certify annually that they are complying with the fiduciary standards set forth in Florida’s investment policy. Managers will be subject to sanction if they fail to timely file the required certification or submit a certification that is materially false. Failure to timely file the required certification could also be grounds for termination of any contract between the state retirement board and the investment advisor or manager. The Florida Attorney General may bring a civil or administrative action and recover reasonable attorneys’ fees and costs (if the action is successful).

Given its novelty and the current lack of interpretative guidance from the state, the stickering requirement has presented certain challenges to managers of Florida public assets. Managers should exercise appropriate care in determining when and how the disclaimer applies in order to make sure it is actually warranted under the circumstances. In situations where stickering applies, managers should make sure the disclaimer is clearly visible and not just part of the fine print. Taking these steps can help a manager demonstrate that it is making a good-faith effort to comply with the Florida law.

Further Information on State ESG Regulation

Be sure to check out our award-winning interactive website, Navigating State Regulation of ESG Investments, which tracks the latest ESG-related legislation, executive actions and initiatives, and coalition activities, as well as changes to state retirement plan investment policies across the United States. In addition, the website offers a variety of podcasts and memos to provide users with easy access to our team’s key insights in understanding this dynamic area.

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