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Florida’s anti-ESG legislation, trumpeted by Governor Ron DeSantis, is poised to become the model for anti-ESG legislation throughout the United States. This second part of a series looking into the details of the legislation will look specifically at the use of state funds to push back on ESG.
One of the most powerful tools we have as consumers is the power of our wallet. We choose where we spend our money. If a restaurant has great service and food, you return to spend more money there. If the waiter is rude and the food is the wrong temperature, you take your money elsewhere. The amount you spend in a restaurant will not significantly impact that restaurant’s success, but if enough people join you that business will either thrive or fail. That is the nature of a free market economy.
States spend money as well, and they make choices where their money is spent. The amount of money they spend is significant. Not only making or breaking a business, but they also have the ability to sway an entire market. For most, the first thing that comes to mind is government contracts, like defense contracts. That is a huge part and will be covered in a later article. State governments also control two large pots of money that they invest, state funds and state pensions. This article focuses on the first.
Every year, state governments pass an annual budget based on expected revenues from taxes and fees. In Florida, the proposed budget for 2023-2024 is $114.8 billion, with $15 billion in reserves. That money does not come in all at once, and it is not spent at once. It comes in spurts, based on when taxes and fees are due. Florida relies heavily on sales tax revenue, which fluctuates throughout the year.
The money goes into different accounts as well, it isn’t one big pot. Sometimes it goes into an agency’s account so they can have access for daily operations and payroll. Other times money goes into a trust account waiting to be spent. That money can sit for years waiting on the particular purpose to arrive. There are also reserves, which are basically the state’s savings account, money put aside in case something goes wrong.
Like we do with our personal accounts, the state puts money that needs to be available to spend immediately into checking accounts which allow quick access. Money that is in reserves, or not going to be spent in the immediate future, gets invested in funds which produce a profit. The management of those funds varies from state to state, but generally fall under a comptroller or chief financial officer. In Florida, the CFO is an elected position, and member of the Florida Cabinet, currently held by Jimmy Patronis.
The person controlling those funds cannot just invest them anyway they want. They have a fiduciary duty to the state. The term fiduciary duty is a bit of a catch all, as the legal definition is very complex with different types of duty, but generally, it establishes a responsibility to invest wisely to maximize returns. When looking at state funds, that duty is defined under state law, bringing us to Florida’s anti-ESG legislation. For a broader look at ESG and a general introduction, read the first article in this series “What is ESG?”
How ESG fits into that fiduciary duty is currently a highly debated topic within financial and legal circles. As it relates to pensions funds, which is covered in the next article in this series, the U.S. Department of Labor has used its authority under the Employee Retirement Income Security Act of 1974, or ERISA, to define, then redefine ESG’s role in the fiduciary duty of fund managers. Under Trump, the DOL issued an ERISA Rule which was intended to prohibit ESG from being considered as a factor, putting the focus on “pecuniary factors.” The Biden Administration’s DOL reversed the Rule, resulting in an override by Congress and Biden’s first veto.
Florida’s anti-ESG legislation defines the Chief Financial Officer’s fiduciary duty to match the Trump era DOL Rule. It even uses the term pecuniary factors. As defined in the legislation, pecuniary factor “means a factor that the Chief Financial Officer, or other party authorized to invest on his or her behalf, prudently determines is expected to have a material effect on the risk or returns of an investment based on appropriate investment horizons consistent with applicable investment objectives and funding policy. The term does not include the consideration or furtherance of any social, political, or ideological interests.” Simply, investments must be made with the only focus being on profits.
This language is not much of a variation from the traditionally accepted definition of fiduciary duty. Under the existing language, Florida was already able to take steps to pull back from ESG funds. In December, CFO Patronis, in conjunction with Governor Ron DeSantis, announced that Florida was divesting $2 billion in investments from BlackRock
However, there is a new legal theory emerging which could undermine the pecuniary factors rational. There is a shift in thinking that is trying to move ESG from a secondary factor, to something that must be considered as part of the calculations of profit. Generally, protecting the environment must be factored in because failure to do so will result in the destruction of our environment and, therefore, end profits. The extreme of that is working its way through the Courts of England and Wales.
Overall, this part of Florida’s anti-ESG legislation is not a drastic change, simply establishing that profits are the main priority. CFO Patronis is a huge opponent of ESG, this language is about the next person to hold the office.