Bringing ESG Into the Family: Regulatory Developments Governing ESG Investments For Family Offices To Watch

While family offices have historically been exempt from many of the more burdensome legal requirements governing investment advisors,¹ they should nevertheless be aware of potentially applicable new rulemaking and legislation on the federal and state level governing environmental, social, and governance (“ESG”) investments.

SEC Private Fund Advisor Rule

The SEC has recently indicated an increased focus on family offices,² and has had a busy past year with a host of new regulations applicable to family offices and private funds (i.e., certain funds exempt from registration with the SEC as investment companies such as hedge funds or private equity finds). Most notably, as discussed in our prior Alert, the SEC amended the Investment Advisors Act³ in August 2023 to subject private fund advisers (including those advisers exempt from registration with the SEC) to a number of notable additional compliance⁴ and disclosure⁵ requirements. Many family offices will be impacted by these rules because they manage private funds, invest in private funds, or engage investment advisors subject to these new rules. On the one hand, these new disclosure requirements will provide family offices with more information and visibility into their private fund investments.⁶ At the same time, one of the more notable aspects of the new rule is that it prohibits private funds from giving investors preferential liquidity arrangements, priority access to fund holdings or exposures, or preferential fee arrangements unless, under certain circumstances, all investors are afforded equal treatment and all terms are disclosed in advance.⁷ This could have a deleterious impact on family offices by effectively negating their ability to privately negotiate advantageous investment arrangements with private funds. These heightened regulations also provide regulators with increased visibility into the operations of private funds, thereby opening family offices and private fund advisers to further exposure under the SEC’s recent wave of ESG regulations and enforcement.⁸

Developments in the SEC’s ESG Regulations

The SEC has also recently taken several noteworthy steps to enhance regulation of ESG practices across the investment industry.

First, the SEC pushed to combat so-called “greenwashing”—where an investment manager overstates a fund’s commitment to ESG principles—by expanding and enhancing the Investment Company Act’s “Names Rule” (Rule 35d-1) in September 2023.⁹ The new Names Rule requires that an “ESG” fund invest at least 80% of the fund’s assets consistent with the investment focus advertised in the fund’s name.¹⁰ As the SEC explained in the rule’s adopting release, “a fund that considers ESG factors alongside but not more centrally than other, non-ESG factors in its investment decisions would not be permitted to use ESG or similar terminology in its name. Doing so would be materially deceptive or misleading” and subject to SEC enforcement action.¹¹ While not specifically targeted by the Names Rule, private funds could still be subject to regulatory and litigation risk if they fail to comply with the rule and misrepresent the nature of their investment strategies.

Second, the SEC also recently proposed enhanced disclosure requirements for ESG investment strategies.¹² The Proposed ESG Rule sets out three categories of ESG funds with different disclosure requirements:

1. “Integration” strategies consider ESG factors but do not place greater significance on such factors than non-ESG factors.¹³ Under the Proposed ESG Rule, integration strategies are required to disclose how they integrate ESG factors into their investment decisions.¹⁴
2. “ESG-Focused” strategies use ESG factors as a “significant or main consideration[]” in their investment decisions.¹⁵ “ESG-Focused Funds” must complete detailed disclosures, including an “ESG Strategy Overview” table consisting of numerous questions and disclosures. For example, ESG-Focused Funds are required to disclose not only how the fund uses ESG factors in making investment decisions but also how the fund voted its proxies on ESG matters, engagement meetings with issuers related to ESG strategy, and its greenhouse gas (GHG) emissions (e.g., their portfolio’s carbon footprint and weighted average carbon intensity).¹⁶
3. “ESG impact” strategies seek to achieve a specific ESG impact or goal.¹⁷ “Impact funds” must disclose how they measure progress in achieving impacts in both quantitative and qualitative terms and summarize their annual achievements towards their stated goals.¹⁸

If passed, the Proposed ESG Rule will significantly increase the amount of public disclosures regarding ESG investment strategies.¹⁹ The Proposed ESG Rule contains an array of provisions, including certain requirements that specifically impact family offices and private funds.²⁰ For example, the Proposed ESG Rule revised Part 1A of Form ADV to include additional questions in Section 7.B.(1) of Schedule D (Private Fund Reporting) about how advisers use ESG factors in providing their investment services to private fund clients.²¹ Among other topics, the SEC requested public comment regarding the appropriateness of its proposed approach, including the breadth of information required about private funds.²²

Expanded Climate-Related Disclosure and Reporting Requirements

Family offices will also potentially be impacted by the growing array of climate-related disclosure requirements applicable to public and private companies to the extent family offices invest in or own public and private portfolios.

On March 6, 2024, the SEC issued its long-pending rule imposing climate-related disclosure requirements on public companies.²³ As explained in detail in our Alert earlier this month, the SEC rule significantly expands and standardizes climate-related disclosures by requiring registrants to report, among other things, climate-related financial risks, activities to mitigate climate risks, board oversight of climate-related risks, relevant risk management processes, and the capitalized costs, expenditures and losses from severe weather events.²⁴ The final rule also requires large accelerated filers and accelerated filers to disclose material greenhouse gas (“GHG”) emissions from a public company’s operations (Scope 1) and energy sources (Scope 2) as well as attestation reports at the limited assurance level.^{25 26} The implementation of the new SEC rule was temporarily blocked by the Fifth Circuit on March 15, 2024.²⁷

These new SEC regulations overlap with an already-complex web of disclosure requirements around the world. For example, on October 7, 2023, California enacted its own climate disclosure scheme, the Climate Accountability Act, which imposes extensive climate-related disclosure requirements on both public and private companies operating in California. As described in our earlier Alert, pursuant to SB 253, beginning in 2026, companies with annual revenues over US$1 billion must disclose their Scope 1 and Scope 2 greenhouse gas emissions and, beginning in 2027, must disclose their Scope 3 emissions.²⁷ Scope 3 emissions include “indirect upstream and downstream greenhouse gas emissions, other than Scope 2 emissions, from sources that the reporting entity does not own or directly control,” which may include “purchased goods and services, business travel, employee commutes, and process and use of sold products.”²⁸ In addition, pursuant to SB 261, companies with annual revenues over US$500 million in California must disclose climate-related financial risks, which the law broadly defines as any “material risk of harm to immediate and long-term financial outcomes due to physical and transition risks, including, but not limited to, risks to corporate operations, provision of goods and services, supply chains, employee health and safety, capital and financial investments, institutional investments, financial standing of loan recipients and borrowers, shareholder value, consumer demand, and financial markets and economic health.”²⁹ SB 253 is expected to apply to approximately 5,000 large companies and SB 261 is expected to apply to approximately 10,000 smaller companies doing business in California.³⁰

The European Union has also adopted its own climate reporting regime, the Corporate Sustainability Reporting Directive (“CSRD”), which will require climate-related financial risk reporting and disclosure of all three categories (Scope 1–3) of emissions for non-EU companies starting in 2028.^{31 32} The EU has also adopted certain European Sustainability Reporting Standards (“ESRS”), which will be applied to EU companies in the 2024 fiscal year and to non-EU companies in 2028.³³ While there are many similarities between the climate disclosures required by the CSRD and the SEC final rule, there are also a number of important differences, including, for example, the scope of entities affected by the rules, the standard for determining materiality, and the precise information that must be disclosed. Finally, in the next year, the EU will phase in its “Climate Border Adjustment Mechanism” which will impose a tax on certain energy intensive industries in respect of all direct and indirect greenhouse gas emissions.

SEC Enforcement

At the same time, the SEC has also dedicated increased resources to investigation of misleading ESG practices. In early 2021, the SEC launched a Climate and ESG Task Force³⁴ and published a Risk Alert detailing common misleading ESG practices.³⁵ The SEC later declared that it would emphasize ESG investing as a focus area in its 2023 fund and adviser examination priorities.³⁶ That task force has also brought several notable enforcement actions in the last two years, including, for example, (i) charging BNY Mellon for inaccurately stating that all investments in certain funds had undergone an ESG quality review and (ii) reaching a US$25 million settlement with Deutsche Bank’s asset-management team for allegedly overstating the degree to which it used sustainable factors in its investment criteria.³⁷ Though enforcement thus far has been focused on public funds and large asset managers, the SEC indicated that it expects to increasingly pursue misleading ESG claims by private funds and their advisors.³⁸

Many family offices will be directly impacted by the new regulations in their investment in ESG funds or with investment advisors that purport to consider ESG principles. In addition, the increased focus of regulators on the accuracy of ESG disclosures could impact those family offices that have incorporated ESG principles into their own investment strategies—which a recent survey estimates at more than one quarter of all family offices.³⁹ Private fund advisers and family offices that pursue an ESG strategy or offer ESG investment products should ensure that they: (1) accurately disclose their ESG investing approach to investors (i.e., with great care not to overstate or misrepresent the extent to which ESG factors are incorporated into the strategy); (2) adopt and implement policies, procedures, and practices to ensure that their ESG disclosures are being followed; and (3) maintain documentation supporting any representations to investors about their ESG practices.

Political Polarization Related to ESG Investments

ESG has become an increasingly polarizing issue in recent years with states entrenching themselves on both sides of the aisle. Anti-ESG lawmaking has resulted in over 150 anti-ESG bills and resolutions introduced in 37 different states, with 18 states enacting “anti-ESG” investing laws over the past year.⁴⁰ Those “anti-ESG” laws have generally fallen into two broad categories: (i) anti-ESG laws that prohibit public entities, including state sponsored pension plans, from considering ESG related factors in their investment decisions and (ii) so called “anti-boycott laws” which blacklist certain financial entities that supposedly prioritize ESG considerations (and have allegedly “boycotted” certain industries like the oil and gas industry). At the same time, on the other side of the political spectrum, six states have enacted “pro-ESG investing” laws. For example, Illinois and Maryland have passed laws requiring state and local government entities to consider risks related to climate change and integrate sustainability factors into their investment decisions⁴¹ and Massachusetts, Maine, and Vermont have considered bills prohibiting state investments in certain industries with poor ESG reputations (e.g., fossil fuels and firearms).⁴²

Thus far, these state ESG investing rules have been primarily focused on government entities, public pension plans, and large financial institutions with limited applicability to family offices in circumstances where they receive capital from such entities. State lawmakers have, however, threatened to expand regulation directly into the private sector, which would be likely to impact family offices more directly. For example, in March 2023, Republican governors from 18 states led by Ron DeSantis of Florida formed an “anti-ESG alliance” to combat the “direct threat” of ESG, including in the financial sector.⁴³ In addition to blocking consideration of ESG in bond issuances and state asset investments, the “alliance” averred to efforts to police the private financial sector, including by prohibiting consideration of so-called “Social Credit Scores” in banking and lending practices.⁴⁴ As another example, Missouri Secretary of State Jay Ashcroft issued a rule on June 1, 2023, requiring financial services professionals to specifically disclose if they “incorporate a social objective or other nonfinancial objective into a discretionary investment decision” and asset managers to get written consent from clients in the state before using any “social and/or nonfinancial objectives” when investing.^{45 46}

These regulations can also impact family offices that invest with and alongside those financial institutions that are subject to these prohibitions. For example, in August 2022, Texas banned state entities from contracting with ten leading financial institutions, including BlackRock, Goldman Sachs, J.P. Morgan, Credit Suisse, and UBS⁴⁷ and, in November 2023, Texas expanded the list of blacklisted entities to require state governmental entities to divest from approximately 350 individual investment funds.^{48 49} Family offices might be weary of doing business with blacklisted managers for fear that they too could become ensnared in these ever expanding list of blacklisted entities or face negative public relations consequences or litigation risk.

ESG investing’s political polarization and increased state legislative efforts show no signs of slowing in advance of the 2024 election. As these anti-ESG efforts expand into the private sector, they could have far-reaching impacts both on family offices that directly incorporate ESG goals into their investment strategies as well as on family offices that invest with those well-known investment managers that have been blacklisted in certain states.

Family Offices with ERISA Governed Assets

Perhaps the most prominent example of the partisan divide over ESG investing is the differing reactions to the DOL final rule “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.”⁵⁰ The DOL Rule provides that a fiduciary “may” consider climate change and other ESG factors if, and only if, they are material to an investment’s risk or return.⁵¹ While ESG proponents touted the rule as a significant shift away from recent Trump administration regulations, the DOL Rule actually adopted a middle of the road approach. The DOL Rule does not disturb ERISA’s bedrock principle that fiduciaries must invest based solely on financial or pecuniary factors relevant to the likely risk and return of an investment, but it does permit fiduciaries to consider ESG issues to the extent those bear on the long term returns or risk of an investment strategy.⁵² In other words, the rule simply removes barriers to—but does not require—consideration of ESG factors as part of a risk-return analysis “consistent with prudent investment decision-making.”⁵³

The DOL Rule has, however, been met with numerous legal and political challenges from anti-ESG advocates who decry it as pushing a liberal agenda threatening the viability of people’s retirement savings. First, Republicans in the House of Representatives passed a Congressional Review Act resolution to override the Final DOL Rule but that resolution was struck down by the first veto of President Biden’s presidency.⁵⁴ Second, a coalition led by 25 Republican state AGs filed a lawsuit challenging the constitutionality of the DOL Rule before Judge Kacsmaryk in the Northern District of Texas.⁵⁵ Judge Kacsmaryk held that the rule does not violate ERISA because it only requires fiduciaries to act prudently and not subordinate financial interests when considering ESG.⁵⁶ As Judge Kacsmaryk wrote at the end of his opinion: “while the Court is not unsympathetic to plaintiff’s concerns over ESG investing trends, it need not condone ESG investing generally or ultimately agree with the Rule to reach this conclusion.”⁵⁷ That decision is currently on appeal to the Fifth Circuit.⁵⁸

To the extent that family offices manage ERISA-governed assets, they should be cognizant of the new DOL Rule and its guidelines for ESG investing. Family offices should also monitor the legal and political challenges to the rule as a barometer of the political climate surrounding ESG investing.

¹ For example, family offices are exempt from having to register as investment advisors with the SEC and from certain tax provisions. See, e.g., Family Offices, Investment Advisors Act Release No. IA03220 (June 22, 2011).
² Melanie Waddell, Why Family Offices Are In SEC’s Crosshairs, THINK ADVISOR (Apr. 26, 2021), https://www.thinkadvisor.com/2021/04/26/why-family-offices-are-in-secs-crosshairs/.
³ Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, 80 Fed. Reg. 63206 (Sept. 14, 2023) (to be codified at 17 C.F.R. pt. 275), https://www.federalregister.gov/documents/2023/09/14/2023-18660/private-fund-advisers-documentation-of-registered-investment-adviser-compliance-reviews; Fact Sheet, Sec. & Exch. Comm’n, Private Fund Adviser Reforms:  Final Rules (Aug. 23, 2023), https://www.sec.gov/files/ia-6383-fact-sheet.pdf).
⁴ For example, the SEC now restricts private fund advisors from engaging in certain activities, including (i) charging the private fund fees or expenses associated with a government investigation of the advisor; (ii) charging regulatory, examination or compliance fees to the private fund (unless disclosed to investors); (iii) borrowing from a private fund without disclosure and consent; and (iv) charging fees related to a portfolio investment on a non-pro rata basis. Private Fund Advisers, Documentation of Registered Investment Adviser Compliance Reviews, 80 Fed. Reg. 63206, 63212 (Sept. 14, 2023) (to be codified at 17 C.F.R. pt. 275), https://www.federalregister.gov/documents/2023/09/14/2023-18660/private-fund-advisers-documentation-of-registered-investment-adviser-compliance-reviews.
⁵ Among other things, the new rules require that all SEC-registered private fund advisers (i) provide investors with quarterly statements detailing performance, fees, and expenses; (ii) obtain an annual audit; and (iii) obtain a fairness opinion for adviser-led secondary transactions. Id. at 63222–60.
⁶ Fact Sheet, Sec. & Exch. Comm’n, Private Fund Adviser Reforms:  Final Rules, at 1 (Aug. 23, 2023), https://www.sec.gov/files/ia-6383-fact-sheet.pdf. 
⁷ Id. at 3.
⁸ See also Melanie Waddell, Why Family Offices Are In SEC’s Crosshairs, THINK ADVISOR (Apr. 26, 2021), https://www.thinkadvisor.com/2021/04/26/why-family-offices-are-in-secs-crosshairs/.
⁹ Douglas Gillison and Michelle Price, US SEC cracks down on funds "greenwashing" with new investment requirement, REUTERS (Sept. 20, 2023), https://www.reuters.com/sustainability/us-sec-poised-ban-deceptive-esg-growth-fund-labels-2023-09-20/; Simon Jessop, Huw Jones and Tommy Wilkes, Regulators start to crack down on greenwashing, REUTERS (June 1, 2022), https://www.reuters.com/business/sustainable-business/regulators-start-crack-down-greenwashing-2022-06-01/. 
¹⁰ Fact Sheet, Sec. & Exch. Comm’n, Final Rules:  Amendments to the Funds “Names Rule,” at 1 (Sept. 20, 2023), https://www.sec.gov/files/33-11238-fact-sheet.pdf; see also Fact Sheet, Sec. & Exch. Comm’n, Amendments to the Funds “Names Rule” (May 25, 2022), https://www.sec.gov/files/ic-34593-fact-sheet.pdf.
¹¹ Fact Sheet, Sec. & Exch. Comm’n, Final Rules:  Amendments to the Funds “Names Rule,” at 2 (Sept. 20, 2023), https://www.sec.gov/files/33-11238-fact-sheet.pdf.
¹² Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices (the “Proposed ESG Rule”), 87 Fed. Reg. 36654 (proposed June 17, 2022) (to be codified at 17 CFR Part 200, 230, 232, 239, 249, 274, and 279), https://www.federalregister.gov/documents/2022/06/17/2022-11718/enhanced-disclosures-by-certain-investment-advisers-and-investment-companies-about-environmental.
¹³ Id. at 36657.
¹⁴ Id. at 36660–62.
¹⁵ Id. at 36657.
¹⁶ Id. at 36662–68.
¹⁷ Id. at 36657.
¹⁸ Id. at 36668–73.
¹⁹ See Fact Sheet, Sec. & Exch. Comm’n, ESG Disclosures for Investment Advisers and Investment Companies (May 25, 2022), https://www.sec.gov/files/ia-6034-fact-sheet.pdf. 
²⁰ Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, 87 Fed. Reg. 36654 (proposed June 17, 2022) (to be codified at 17 CFR Part 200, 230, 232, 239, 249, 274, and 279), https://www.federalregister.gov/documents/2022/06/17/2022-11718/enhanced-disclosures-by-certain-investment-advisers-and-investment-companies-about-environmental; Fact Sheet, Sec. & Exch. Comm’n, ESG Disclosures for Investment Advisers and Investment Companies (May 25, 2022), https://www.sec.gov/files/ia-6034-fact-sheet.pdf.
²¹ Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, 87 Fed. Reg. 36654, 36692–94 (proposed June 17, 2022) (to be codified at 17 CFR Part 200, 230, 232, 239, 249, 274, and 279), https://www.federalregister.gov/documents/2022/06/17/2022-11718/enhanced-disclosures-by-certain-investment-advisers-and-investment-companies-about-environmental. 
²² See id. at 36695–96.
²³ Press Release, Sec. & Exch. Comm’n, SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors (Mar. 6, 2024), https://www.sec.gov/news/press-release/2024-31.
²⁴ Fact Sheet, Sec. & Exch. Comm’n, The Enhancement and Standardization of Climate-Related Disclosures:  Final Rules (Mar. 6, 2024), https://www.sec.gov/files/33-11275-fact-sheet.pdf; Final Rule, Sec. & Exch. Comm’n, The Enhancement and Standardization of Climate-Related Disclosures for Investors (Mar. 6, 2024) (to be codified at 17 CFR 210, 229, 230, 232, 239, and 249), https://www.sec.gov/files/rules/final/2024/33-11275.pdf. 
²⁵ While the March 2024 final rule significantly expanded climate-related disclosure obligations, it is notable that the Final Rule was a scaled back version of the disclosure scheme that the SEC originally proposed in March 2022. See Press Release, Sec. & Exch. Comm’n, SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors (Mar. 6, 2024), https://www.sec.gov/news/press-release/2024-31. In particular, the final rule dropped the requirement that registrants disclose Scope 3 GHG emissions from a company’s “value” chain, such as emissions generated by a company’s suppliers and by customers using its products and made disclosures of Scope 1 and 2 emissions mandatory, only if a company deems them “material.” See Fact Sheet, Sec. & Exch. Comm’n, The Enhancement and Standardization of Climate-Related Disclosures:  Final Rules (Mar. 6, 2024), https://www.sec.gov/files/33-11275-fact-sheet.pdf; Final Rule, Sec. & Exch. Comm’n, The Enhancement and Standardization of Climate-Related Disclosures for Investors (Mar. 6, 2024) (to be codified at 17 CFR 210, 229, 230, 232, 239, and 249), https://www.sec.gov/files/rules/final/2024/33-11275.pdf. 
²⁶ The ultimate impact of the SEC’s new climate-related disclosure requirements will be largely dictated by the outcome of numerous legal challenges, which have already begun to be filed.  Within hours of the final rule’s release, a coalition of ten states led by West Virginia and Georgia filed a petition for review with the Eleventh Circuit, arguing that the Final Rule lacks statutory authority and raises First Amendment concerns. See, e.g., Carly Mindock, Republican-led states sue US SEC over climate risk disclosure rules, REUTERS (Mar. 6, 2024), https://www.msn.com/en-us/news/us/republican-led-states-sue-us-sec-over-climate-risk-disclosure-rules/ar-BB1js0b0. 
²⁷ Liberty Energy, et al., v. Sec. & Exch. Comm’n, 24-60109 (5th Cir. Mar. 15, 2024) (unpublished order granting motion for an administrative stay).
²⁸ Cal. SB 253 (in effect Jan. 1., 2024); Cal. SB 261 (in effect Jan. 1., 2024); Harry Engler, Companies need to integrate climate reporting across functions to comply with California’s new law, REUTERS (Oct. 23, 2023), https://www.reuters.com/legal/legalindustry/companies-need-integrate-climate-reporting-across-functions-comply-with-2023-10-20/.
²⁹ Reporting entities that fail to timely file their annual disclosures will be subject to administrative penalties of up to US$500,000 per reporting year.
³⁰ Cal. SB 253 (in effect Jan. 1., 2024); Cal. SB 261 (in effect Jan. 1., 2024); Harry Engler, Companies need to integrate climate reporting across functions to comply with California’s new law, REUTERS (Oct. 23, 2023), https://www.reuters.com/legal/legalindustry/companies-need-integrate-climate-reporting-across-functions-comply-with-2023-10-20/. 
³¹ Certain trade organizations (e.g., the US Chamber of Commerce, National Association of Manufacturers, and the American Farm Bureau Federation) have sued to stop California from implementing SB 253 and SB 261.
³² European Commission, Sustainability-related disclosure in the financial services sector, https://finance.ec.europa.eu/sustainable-finance/disclosures/sustainability-related-disclosure-financial-services-sector_en.
³³ The member states of the European Union also impose their own additional ESG disclosure requirements. Germany, for instance, recently enacted the German Supply Chain Due Diligence Act requiring companies with over 1,000 employees to “make reasonable efforts” to investigate and report on human rights and environmental risks in their supply chains. Federal Ministry of Labour and Social Affairs, Act on Corporate Due Diligence Obligations in Supply Chains, https://www.csr-in-deutschland.de/EN/Business-Human-Rights/Supply-Chain-Act/supply-chain-act.html.
³⁴ Press Release, Council of the European Union, Council and Parliament agree to delay sustainability reporting for certain sectors and third-country companies by two years (Feb. 7, 2024), https://www.consilium.europa.eu/en/press/press-releases/2024/02/07/council-and-parliament-agree-to-delay-sustainability-reporting-for-certain-sectors-and-third-country-companies-by-two-years/.
³⁵ Press Release, Sec. & Exch. Comm’n, SEC Announces Enforcement Task Force Focused on Climate and ESG Issues (Mar. 4, 2021), https://www.sec.gov/news/press-release/2021-42.
³⁶ Sec. & Exch. Comm’n Div. of Examination, The Division of Examinations’ Review of ESG Investing (Apr. 9, 2021), https://www.sec.gov/files/esg-risk-alert.pdf. 
³⁷ Sec. & Exch. Comm’n Div. of Examinations, 2023 Examination Priorities, at 13 (2023),  https://www.sec.gov/files/2023-exam-priorities.pdf. 
³⁸ Press Release, Sec. & Exch. Comm’n, SEC Charges BNY Mellon Investment Adviser for Misstatements and Omissions Concerning ESG Considerations (May 23, 2022), https://www.sec.gov/news/press-release/2022-86; Press Release, Sec. & Exch. Comm’n, Deutsche Bank Subsidiary DWS to Pay $25 Million for Anti-Money Laundering Violations and Misstatements Regarding ESG Investments (Sept. 25, 2023), https://www.sec.gov/news/press-release/2023-194.
³⁹ See, e.g., Melanie Waddell, Why Family Offices Are In SEC’s Crosshairs, THINK ADVISOR (Apr. 26, 2021), https://www.thinkadvisor.com/2021/04/26/why-family-offices-are-in-secs-crosshairs/.
⁴⁰ UBS, Global Family Office Report, at 22–23 (2020), https://www.ubs.com/global/en/family-office-uhnw/reports/global-family-office-report-2020.html; see also The Rise of ESG Investing Among Family Offices, FINTRX (Oct. 24, 2022), https://www.fintrx.com/blog/the-rise-of-esg-impact-investing-among-family-offices-0.
⁴¹ See, e.g., Fla. HB 3 (in effect July 1, 2023); Ind. HB 1008, (in effect July 1, 2023); Ky. HB 236, (in effect June 29, 2023); La. HCR 110 (in effect Jun.7, 2023); Mo. 12 (in effect May 12, 2023); Mont. HJ 11 (in effect Apr. 14, 2023).
⁴² Ill. HB 2782 (in effect Jan. 1, 2024); Md. HB 740 / SB 566 (in effect June 1, 2022).
⁴³ Me. HP 65/ LD 99 (in effect Oct. 18, 2021) (fossil fuel); Mass. HD 3680 (introduced Jan. 20, 2023, firearms); Mass. HD 2669 (introduced Jan. 19, 2023) (fossil fuel); Vt. S 42 (introduced Jan. 26, 2023) (fossil fuel); Vt. H 197 (introduced Feb. 8, 2023) (fossil fuel).
⁴⁴ Press Release, Fla. Governor, Joint Governors Policy Statement on ESG (Mar. 16, 2023), https://www.flgov.com/wp-content/uploads/2023/03/Joint-Governors-Policy-Statement-on-ESG-3.16.2023.pdf; Insurers and Financial Institutions Face Increasing Scrutiny from States in the ESG Debate, BRADLEY (July 11, 2023), https://www.bradley.com/insights/publications/2023/07/insurers-and-financial-institutions-face-increasing-scrutiny-from-states-in-the-esg-debate.
⁴⁵ Press Release, Fla. Governor, Joint Governors Policy Statement on ESG, at 1 (Mar. 16, 2023), https://www.flgov.com/wp-content/uploads/2023/03/Joint-Governors-Policy-Statement-on-ESG-3.16.2023.pdf.
⁴⁶ Mo. Cod Regs. Ann. Tit. 15, 30-51.170(3)(A), 30-51.172(3)(A) (2023); see Ross Kerber, New anti-ESG rule in Missouri offers US Republicans another path away from ‘wokeness,’ REUTERS (July 10, 2023), https://www.reuters.com/sustainability/sustainable-finance-reporting/new-anti-esg-rule-missouri-offers-us-republicans-another-path-away-wokeness-2023-07-10/.
⁴⁷ In this regulatory climate, asset managers have also started to face increased risk of litigation or regulatory action based on their membership in organizations that require a commitment to reducing carbon emissions, including the United Nations Net-Zero Insurance Alliance (NZIA), Net-Zero Asset Managers Initiative (NZAM) and Climate Action 100+. For example, in May 2023, a coalition of 23 Republican state attorneys general sent a warning letter to NZIA members expressing “serious concerns” about the legality of adopting NZIA’s reduced emissions targets. Letter from Attorneys Gen. to NetZero Insurance Alliance, Utah Attorney Gen. (May 15, 2023), https://attorneygeneral.utah.gov/wp-content/uploads/2023/05/2023-05-15-NZIA-Letter.pdf. In addition, on July 6, 2023, the House Judiciary Committee notified BlackRock and State Street that they were being investigated for alleged violations of federal antitrust laws based on their respective roles in entering “collusive agreements” to “‘decarbonize’ assets under management and reduce emissions to net zero,” through Climate Action 100+ and NZAM. Press Release, House of Representatives Judiciary Comm., Chairman Jordan Subpoenas BlackRock and State Street in ESG Investigation (Dec. 15, 2023), https://judiciary.house.gov/media/press-releases/chairman-jordan-subpoenas-blackrock-and-state-street-esg-investigation. The Judiciary Committee issued subpoenas for further materials on December 15, 2023. Id. Most notably, in December 2023, BlackRock was sued by the Tennessee Attorney General for allegedly breaching consumer protection laws. Press Release, Tenn. Attorney Gen. & Reporter, Tennessee Sues BlackRock in First-of-its-Kind Consumer Protection Suit over ESG Considerations (Dec. 18, 2023), https://www.tn.gov/attorneygeneral/news/2023/12/18/pr23-59.html#:~:text=Nashville-%20On%20Monday%2C%20Tennessee%20Attorney%20General%20Jonathan%20Skrmetti,and%20Governance%20%28ESG%29%20considerations%20affect%20BlackRock%E2%80%99s%20investment%20strategies. The Tennessee Attorney General alleges that BlackRock’s involvement in Climate Action 100+ and the Net Zero Asset Managers initiative required BlackRock to pursue ESG goals across all of its assets under management, and thus BlackRock must have falsely marketed certain funds as “non-ESG” funds. Id. Similarly, just last month, Texas Attorney General Ken Paxton forbade Barclays from continuing to underwrite state municipal bonds based on concerns that Barclay’s may be a “fossil fuel boycotter” because of its NZAM membership. Isla Binnie, Texas bans Barclays from local govt debt business over ESG concerns, REUTERS (Jan. 26, 2024), https://www.reuters.com/sustainability/texas-bans-barclays-local-govt-debt-business-over-esg-concerns-2024-01-26/.
⁴⁸ Mitchell Ferman, Texas bans local, state government entities from doing business with firms that “boycott” fossil fuels, TEXAS TRIBUNE (Aug. 24, 2022), https://www.texastribune.org/2022/08/24/texas-boycott-companies-fossil-fuels/. 
⁴⁹ Press Release, Tex. Comptroller of Pub. Accounts, Texas Comptroller Glenn Hegar Announces Update to List of Financial Companies that Boycott Energy Companies (Nov. 1, 2023), https://comptroller.texas.gov/about/media-center/news/20231101-texas-comptroller-glenn-hegar-announces-update-to-list-of-financial-companies-that-boycott-energy-companies-1698777763111.
⁵⁰ Oklahoma similarly maintains its own list of financial institutions ineligible for state contracts, starting with 13 companies in May 2023 but cutting that down to six companies in August 2023, including BlackRock, Wells Fargo & Co., JPMorgan Chase & Co., Bank of America, and State Street. Mike W. Ray, Treasurer singles out 13 institutions as violators of state’s new ESG law, SOUTHWEST LEDGER (May 9, 2023), https://www.southwestledger.news/news/treasurer-singles-out-13-institutions-violators-states-new-esg-law; William C. Wertz, Oklahoma shortens the list of banned banks, Bank of America, Wells Fargo still barred, THE OKLAHOMAN (Aug. 16, 2023), https://www.oklahoman.com/story/news/politics/state/2023/08/16/oklahoma-bank-blacklist-shortened-jp-morgan-chase-boa-wells-fargo/70599055007/.
⁵¹ Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (the “DOL Rule”), 87 Fed. Reg. 73822 (December 1, 2022) (to be codified at 29 C.F.R. 2550), https://www.federalregister.gov/documents/2022/12/01/2022-25783/prudence-and-loyalty-in-selecting-plan-investments-and-exercising-shareholder-rights.
⁵² As the DOL observed, “a fiduciary may reasonably conclude that climate-related factors, such as a corporation’s exposure to the real and potential economic effects of climate change including exposure to the physical and transitional risks of climate change and the positive or negative effect of Government regulations and policies to mitigate climate change, can be relevant to a risk/return analysis of an investment or investment course of action.” Id. at 73832.
⁵³ Id.
⁵⁴ Letter from Attorneys Gen. to Congress, at 1 (Dec. 14, 2023), https://www.ag.state.mn.us/Office/Communications/2023/docs/ESG_LetterToCongress.pdf. In December 2023, 18 state AGs, led by Keith Ellison of Minnesota and Kristin Mayes of Arizona, sent a letter to the US Congress defending the DOL Rule and the propriety of considering ESG in making fiduciary decisions over long-term investment horizons. The letter makes clear that it “does not advocate for the use of ESG factors to promote policy goals (“ESG-impact” strategies); rather it explains why fund managers should be free to integrate ESG factors into their scope of considerations for investment decisions.” Id. at 11.
⁵⁵ Paul Mulholland, Biden Uses First Veto to Uphold DOL ESG Rule, PLAN SPONSOR (Mar. 20, 2023), https://www.plansponsor.com/biden-uses-first-veto-to-uphold-dol-esg-rule/; Kathryn Mayer, Biden Vetoes Anti-ESG Investing Legislation, SOCIETY FOR HUMAN RESOURCE MANAGEMENT (Mar. 20, 2023), https://www.shrm.org/topics-tools/news/benefits-compensation/biden-vetoes-anti-esg-investing-legislation. House Republicans tried again a few months later by proposing the Ensuring Sound Guidance Act amending ERISA to only permit consideration of financial gains when choosing investments, but this bill has not been discussed in either house of Congress. See H.R.4237, Ensuring Sound Guidance Act (introduced June 21, 2023), https://www.congress.gov/bill/118th-congress/house-bill/4237/all-actions?s=1&r=45.
⁵⁶ A separate lawsuit challenging the ESG rule in the U.S. District Court for the Eastern District of Wisconsin Milwaukee Division is still ongoing. That case is called Braun and Luehrs v. Walsh.
⁵⁷ Utah v. Walsh, 2023 WL 6205926, at *1 (N.D. Tex. Sept. 21, 2023).
⁵⁸ Id. at *8.
⁵⁹ Utah v. Su, 23-11097 (5th Cir.).

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