The battle over whether consideration of environmental, social and governance (ESG) factors should be considered in retirement plan investing continues to rage on. The latest in the saga involves a new Florida law that could create significant complications for investment managers and plan sponsors. The new law restricts any state or local governments from considering any non-pecuniary (or non-financial) issues when selecting their investments beginning July 1.
Because the state of Florida is a frequent investor in funds, this uniquely restrictive law will almost certainly significantly affect investment managers and retirement plans. The law itself is much more restrictive and departs from some of the rules that have been put into place by other states — so it's important for advisors to pay close attention to the details in the coming months.
HB 3: Background
Florida Gov. Ron DeSantis signed House Bill 3 (HB 3, also titled "An Act Relating to Government and Corporate Activism") into law on Tuesday. The law is one of the most restrictive in the nation and extends to all funds invested by state and local governments in the state of Florida — including assets held by retirement plans.
Generally speaking, the Florida law prohibits plans from investing based on non-pecuniary factors, including ESG factors. "ESG factors" are designed to assess whether companies are environmentally or socially conscious. ESG investing, also known as "sustainable investing" is a term given to investment strategies that consider more than an investment's profitability when making investment decisions.
"Pecuniary factors" is defined as any factor that is expected to have a material impact on the risk or returns of any given investment, consistent with investment decisions, that does not include consideration of social, political or ideological factors.
At the federal level, President Joe Biden issued his first presidential veto to keep a set of federal ESG-neutral regulations in place. The House of Representatives failed to secure the required two-thirds vote that could have overridden Biden's veto.
Under those regulations, it is up to the responsible plan fiduciary to determine whether ESG factors are relevant to an investment decision — with the investment's potential financial performance remaining the key driving consideration. Florida's law essentially prohibits all consideration of ESG factors by applicable parties.
Unique Aspects of HB 3
Florida's HB 3 diverges from the laws enacted in other states on many different levels. Its requirements are much more specific than a mere prohibition of consideration of ESG factors in investment decision practices.
