State focus: Oklahoma’s boycott statute – A poster child for the interpretive and operational challenges of ESG laws

Late last year, Ropes & Gray published a white paper that focuses on the current climate regarding ESG regulation with respect to the investment of state retirement plan assets.  The white paper is intended to be a companion piece to our award-winning Navigating State Regulation of ESG website.

While the website offers detailed summaries of ESG-related developments in all 50 states, the white paper is meant to provide both an overview of the pro- and anti-ESG dynamics playing out in the public pension arena and executive summaries of the overall investment climate in each state.

Since the start of 2024, lawmakers in many states have picked up right where they left off last year, introducing new bills seeking to:

• Further rein in the use of ESG considerations in investment decision-making by public pension boards and other governmental entities; or
• Promote the role of ESG factors in such decisions.

Oklahoma has been particularly active in this space. As highlighted in a February 26, 2024 article in Pensions & Investments (“Oklahoma advances bills to amend anti-ESG law”), both chambers of the Oklahoma Legislature have recently advanced bills to amend its law requiring state pension systems to unwind investments with asset managers that have been deemed to boycott the oil and gas industry.

Creation of Oklahoma’s restricted list

By way of background, the state enacted the “Energy Discrimination Elimination Act of 2022,” Okla. Stat. tit. 74, § 12001 et seq. (the “Act”), which requires companies, including financial institutions, which do business with the state (such as banks managing state pension system funds) to affirm that they do not and will not boycott energy companies. Otherwise, the state will place the financial institution on a restricted list.

The Treasurer’s determination of which financial institutions are boycotters can be based on publicly available information as well as responses to the Treasurer’s request for written verification from a financial institution that it does not boycott energy companies.  The Act prohibits investment by state entities in listed financial companies and requires divestment within 360 days if the listed financial company does not cease its boycott within a specified period of time upon receiving notice of the state’s intention to divest.  Oklahoma is one of a handful of states with a restricted list of financial institutions, joining Kentucky, Texas and West Virginia.

The Act exempts a state governmental entity from having to comply if it determines that doing so would be inconsistent with its fiduciary responsibility with respect to the investment of entity assets or other duties imposed by law relating to the investment of entity assets.

In May 2023, the office of Treasurer Todd Russ released its initial list of financial companies that have been found to be engaging in energy company boycotts, and the office subsequently revised its list on August 15, 2023. 

Differing opinions on the reach of Oklahoma’s anti-boycott law

Also in August, the Oklahoma Public Employees Retirement System (“OPERS”) board voted to exempt the pension fund from having to terminate contracts with listed financial institutions based on the board’s determination that divestiture would be inconsistent with its fiduciary responsibility overseeing OPERS assets. Treasurer Russ was the lone dissenting vote in the OPERS board vote to invoke the fiduciary exemption.

On October 11, 2023, the state Senate convened a nearly three-hour hearing regarding the boycott statute, in which Treasurer Russ was asked about his office’s list of restricted financial companies.  During the hearing, Treasurer Russ repeatedly questioned the ability of the OPERS board to rely on the statute’s fiduciary exemption, which some lawmakers continued to advocate for, and the Treasurer called for legislators to narrow the exception or retract it entirely.

Challenge in the courts

Adding to this conflict, on November 21, 2023, former state employee Don Keenan sought a temporary restraining order against Treasurer Russ regarding Oklahoma's list of restricted financial institutions.  Among other claims, the lawsuit alleged that the Treasurer’s actions violate the First Amendment of the U.S. Constitution and that the Oklahoma law defies the state’s Constitution.

In particular, the complaint notes that the Oklahoma Constitution “requires state managed pension systems to operate for the ‘exclusive benefit’ of their beneficiaries…and even though the ‘exclusive benefit’ rule is constitutionally mandated…the legislature attempted to absolve the Treasurer and pension systems of their constitutional fiduciary duties by literally saying that they were ‘exempt from any conflicting statutory or common law obligations including any obligations with respect to making investments, divesting from any investment, preparing or maintaining any list of financial companies, or choosing asset managers, investment funds, or investments for the state governmental entity's securities portfolios’."  It concludes by saying "[t]he state’s decision to use its retirees’ retirement funds as political fodder in its quixotic quest to prove a point is patently unconstitutional and violates federal law.”

Mr. Keenan’s lawsuit, which is backed by a coalition that includes the Oklahoma Public Employees Association, is the first such suit brought by a plan participant challenging a boycott law anywhere in the United States. 

Remedying the confusion?

Treasurer Russ has described the Act as being “clear enough to know the spirit and the intent of the law and the legislature to watch over Oklahomans and the economic engines that help drive our state,” but admitted that it could benefit from clarification in the legislature. “I think I know what it means…[b]ut some are saying that they don’t read it the same way I do and therefore they feel like they can just claim a general ‘Well, based on my fiduciary responsibility, I’m not enforcing it.’”

Currently, there are two different bills—S.B. 1536 and H.B. 3541—making their way through the lawmaking process that would amend the Act by significantly curtailing the ability to rely on the fiduciary exemption and expanding the discretionary authority of the Treasurer and the Attorney General to implement and enforce the statute. 

S.B. 1536 is narrower in scope, stipulating that in the event the Treasurer disagrees with a state governmental entity that is seeking to rely on an exemption from having to divest from a listed financial institution, the Treasurer must secure the opinion of the Oklahoma Attorney General as to whether the entity’s determination is in compliance with state laws binding the entity.

H.B. 3541 proposes various changes, including, among other things:

• Broadening the categories of companies that are the subject of financial institution boycotts to include: timber, mining and agriculture businesses;
• Expanding the scope of financial institutions to include any company (public or private) that is engaged in financial services, or banking or that is an investment company; and
• Requiring state entities claiming exemptions to have to show that divestment would lead to what it defines as a “materially negative financial impact” and requiring the Treasurer’s agreement that an exemption is warranted.

Moreover, H.B.3541 would eliminate an exemption allowing public pension funds from having to divest from indirect holdings in actively managed or passively managed investment funds or private equity funds. The bill would also prevent entities from delaying or ceasing the termination of contracts with blacklisted firms if they expect a loss in value or a benchmark deviation in performance. 

Conclusion

Oklahoma’s boycott statute is a prime example of the interpretive and operational challenges raised by the ESG laws that have been enacted across the United States.  How can an agency charged with implementing a law be held accountable for the financial companies it determines should be placed on the restricted list?  When should the law’s fiduciary exemption be invoked?  

The outcome of the legislature’s current attempts to clarify the Act as well as the ongoing litigation may provide valuable lessons for other states as they try to address the endemic confusion and ambiguities of ESG laws. 

For further insights or information on what is happening on the ground in Oklahoma or other states, please reach out to one of us, or any other member of the Ropes & Gray state ESG team.

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