The Liability Trap : Why the ALEC Anti-ESG Bills Create a Legal Quagmire for Fiduciaries Connected with Public Pensions

Two proposed bills barring public pensions from considering environmental, social, and governance investment criteria create massive legal risk for any pension fiduciary or service provider. The American Legislative Exchange Council “boycott bill” and the “fiduciary duty” bill, if adopted, would impose irreconcilable legal requirements on such fiduciaries, and subject them to compliance with arbitrary and unworkable legal demands. The main legal problems the bills create fall into four categories: (1) the unworkable distinction between “pecuniary” and “non-pecuniary,” a distinction so blurry that the bills are self-contradictory, as we demonstrate; (2) the clash between the bills’ definition of materiality and that established by the Supreme Court of the United States, such that state law would bar consideration of investment information that federal law requires; (3) similarly vague and self-contradictory requirements to boycott companies that engage in ESG, and (4) the transfer of control of proxy voting to elected officials, thereby ensuring the politicization of such voting in direct conflict with the bills’ stated goals.The boycott bill and the fiduciary duty bill dramatically increase liability risk for plan fiduciaries and service providers without providing any corresponding or even off-setting benefits to fiduciaries or their members. They will reduce the number of service providers willing to work with such pensions, increase liability, insurance, and investment costs for taxpayers, and fund participants and beneficiaries. They should be rejected