Missouri’s Anti-ESG Investment Rule Struck Down by Federal Court

A U.S. federal court has struck down Missouri’s recent regulation aimed at restricting the incorporation of Environmental, Social, and Governance (ESG) factors into investment advice. The court ruled that the regulation, introduced by Missouri Secretary of State Jay Ashcroft in 2023, was both vague and unconstitutional.

The regulation required financial professionals in Missouri to obtain written consent from clients before incorporating any “nonfinancial objective,” such as social or environmental goals, into their investment advice. The consent form mandated by the rule included language stating that such advice “will result in investments and recommendations that are not solely focused on maximizing a financial return.”

This rule was part of a broader national movement against ESG investing, primarily led by Republican politicians. Missouri has been an active participant in this movement, with its state pension fund announcing in 2022 the withdrawal of hundreds of millions of dollars from BlackRock, accusing the firm of prioritizing ESG initiatives over shareholder returns. The state also joined a multi-state alliance in 2023, led by Florida Governor Ron DeSantis, to combat the influence of ESG considerations in state and local pension funds.

However, the Securities Industry and Financial Markets Association (SIFMA) challenged Missouri’s regulation in court. SIFMA argued that the rule’s broad definition of “nonfinancial objectives” could inadvertently include other standard considerations in investment advice, such as tax implications, liquidity, diversification, and investment time horizons.

District Judge Stephen Bough ruled that the Missouri regulation was “unconstitutionally vague,” highlighting the severe penalties for non-compliance, which included potential loss of registration, civil penalties of up to $25,000 per violation, and even criminal charges. The court’s decision imposed a permanent statewide injunction, effectively preventing the rule from being enforced.

Kenneth E. Bentsen, Jr., President and CEO of SIFMA, hailed the decision as a significant victory for the U.S. securities market. He emphasized that existing federal securities laws already require financial professionals to prioritize their customers’ best interests when providing investment advice, rendering the Missouri rule unnecessary and confusing.