US Judge Blocks Missouri Rule Limiting Socially-Conscious Investing, Reports Reuters

A federal judge in Missouri has overturned a state rule that aimed to restrict financial professionals from considering environmental, social, and corporate governance (ESG) factors when providing investment advice.

U.S. District Judge Stephen Bough, based in Kansas City, ruled in favor of the Securities Industry and Financial Markets Association, stating that the 2023 regulation was invalid because it imposed requirements on investment banks and broker-dealers that are not present in federal law.

The rule, introduced by Missouri Secretary of State Jay Ashcroft, mandated that investment advisers who factor in ESG objectives—like addressing climate change or supporting social movements—must inform their clients and secure their consent.

Judge Bough noted that the Missouri rule not only conflicted with federal law but also infringed on the free-speech rights of investment advisers and was too ambiguous to be enforceable under the U.S. Constitution. He suggested that state officials could have pursued a public-information campaign to communicate their message instead.

While Ashcroft’s office engaged private counsel to defend the rule, the Missouri Attorney General’s office is not participating in the case.

Kenneth Bentsen, CEO of SIFMA, criticized Missouri’s rule as unnecessary and detrimental to the uniform regulation of the securities market, which is already established by federal law that requires financial professionals to operate in their clients’ best interests. He emphasized that this obligation prohibits professionals from prioritizing their own interests over those of their clients.

Missouri’s regulation is part of a larger trend among Republican-led states to limit the increasing influence of ESG considerations in business and investment decisions, including those affecting employee retirement plans that manage trillions of dollars.

During Donald Trump’s presidency, a rule was implemented that barred retirement plans from factoring in “non-pecuniary” elements in investment decisions. The Biden administration has since rescinded this rule, a move currently facing legal challenges.