Environmental, social, and governance (ESG) metrics are a popular kind of social credit scoring, one that poses a significant threat to individual liberty and free-market economies, both in the United States and abroad.
ESG is regularly used by corporations and investors as a tool to impose progressive values and environmental policies on other businesses, governments, families, and individuals. ESG has been widely adopted in recent years by corporations across the United States and Europe. A 2023 report by the International Federation of Accountants and the Association of International Certified Professional Accountants found that 95 percent of large global companies produce ESG reports each year.
Since January 2022, freedom-minded policymakers in more than 20 states have introduced legislation designed to discourage or limit the use of ESG by investment management firms, governments, public pensions, and/or financial institutions. These legislative efforts have sought to address the ESG problem in a multitude of ways. For example, lawmakers in Texas and West Virginia have created regulations that prevent state pension funds and some agencies from utilizing services provided by firms that use ESG metrics in some of their most important business practices.
Perhaps the most far-reaching attempt to stop the spread of ESG, however, has come from lawmakers who have proposed regulations that would stop banks and/or insurance companies from using ESG when making determinations about access to banking or insurance services. Dozens of the world’s most powerful banks and insurance companies have, to varying degrees, weaponized ESG to screen out businesses and even some individuals who refuse to comply with those institutions’ social justice or environmental policies.
Although there are many examples of financial institutions flexing their muscles as a tactic to create larger social changes, perhaps the most economically important is that virtually every large bank in the United States has committed to forcing the businesses they work with to phase out their use of fossil fuels—even if it causes economic harm to customers and business. Many of these financial institutions have pledged to make their entire business portfolios “net-zero emissions” by 2050, and to halve their emissions by 2030, less than seven years from the publication of this paper. If fulfilled, these pledges would necessitate that banks eliminate all or nearly all lending and banking activities with customers who use fossil fuels, including individuals who drive gasoline-powered motor vehicles, significantly impacting virtually every family and industry in the United States.
On May 2, 2023, Florida Gov. Ron DeSantis signed into law historic legislation that restricts banks’ use of ESG metrics, the first time such a ban has been established at the state level. Prior to and following the passage of the bill, many bank and insurance lobbyists, left-wing activist organizations, and some Democratic politicians have claimed that states, including Florida, have no right to prevent banks from imposing ESG standards on their customers, even in cases where virtually every bank in a region is using similar metrics. They have claimed state policymakers do not have authority to regulate many of the largest banks operating within their state’s borders, because federally chartered banks can only be regulated by federal agencies.
This paper shows that such claims are false and largely based on a poor understanding of Supreme Court precedence and federal law. The best evidence shows that existing federal law does grant states the power to regulate banks’ use of ESG and other forms of social credit scoring, contrary to the claims of bank lobbyists and their allies. Thus, legislative efforts such as those achieved in Florida in May 2023 are likely to survive any legal challenges that assert only federal agencies can regulate federally chartered banks on the issue of ESG.
Before providing evidence to support this view, it is important to note that this paper does not seek to persuade lawmakers to pass anti-ESG legislation, including laws governing ESG in banking. It is solely focused on the question of the legality of state ESG banking rules.
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