Florida's Anti-Woke Banking Law: Treasury Department's Warning and Potential Consequences

Introduction

Florida's Anti-Woke Law: An Overview

On March 28, 2023, Governor Ron DeSantis signed into law HB 1035, the Individual Freedom Act, which prohibits financial institutions from considering social, environmental, or governance (ESG) factors in their investment decisions. This law, commonly referred to as the "anti-woke" banking law, has been met with significant pushback from the Biden administration and the financial industry.

Treasury Department's Warning

On April 12, 2023, the U.S. Treasury Department issued a statement warning financial institutions against complying with Florida's anti-woke law. The Department asserted that the law "is likely preempted by federal law and raises significant legal and compliance risks for regulated institutions."

Potential Consequences of the Anti-Woke Law

Financial Institution Risk

The Treasury Department's warning highlights the potential legal and compliance risks faced by financial institutions that comply with Florida's anti-woke law. These risks include:

• Federal Preemption: The law may be preempted by the National Bank Act, which gives federally chartered banks broad authority to invest in assets they deem prudent.
• Fiduciary Duty: Financial institutions have a fiduciary duty to their customers to invest their funds in a prudent manner. The anti-woke law could limit their ability to do so.
• Investor Confusion: The law could lead to confusion and uncertainty among investors about the types of investments financial institutions can make.

ESG Investment Impact

The anti-woke law could also have significant implications for ESG investment in Florida:

• Reduced ESG Investment: The law may deter financial institutions from investing in ESG-focused companies, as they may not want to risk violating the law.
• Higher Capital Costs: Companies that rely on ESG investment may face higher capital costs as a result of the law.
• Damage to Florida's Economy: ESG investment is a growing industry, and the anti-woke law could harm Florida's economy by limiting access to this type of investment.

Stories and Lessons Learned

STORY 1: The Boston Trust Company

In 2022, Boston Trust Company, a subsidiary of Boston Private Financial Holdings, agreed to pay a $12 million fine to the OCC for violating its fiduciary duty by investing in a private equity fund that focused on ESG factors. This case highlights the potential legal risks faced by financial institutions that consider ESG factors in their investment decisions.

Lesson Learned: Financial institutions need to be aware of the potential legal risks associated with ESG investment and ensure they are complying with all applicable laws and regulations.

STORY 2: The State of California

California has been a leader in the area of ESG investment. In 2020, the state passed the California Environmental, Social, and Governance Transparency and Accountability Act, which requires large financial institutions to disclose how they consider ESG factors in their investment decisions. This law has been successful in encouraging ESG investment in California.

Lesson Learned: Governments can play a role in promoting ESG investment by passing laws that encourage transparency and accountability.

STORY 3: BlackRock

BlackRock, the world's largest asset manager, has been a vocal supporter of ESG investment. In 2021, the company launched a new fund focused on companies that are committed to reducing their carbon emissions. This fund has attracted billions of dollars in investment.

Lesson Learned: ESG investment is a growing trend that is being driven by both investors and financial institutions.

Comparison of Florida's Anti-Woke Law and Other States' Laws

FAQs

Q: What is ESG investment?
A: ESG investment is a type of investment that considers environmental, social, and governance factors in addition to financial factors.

Q: Why are financial institutions considering ESG factors in their investment decisions?
A: Investors are increasingly demanding ESG-focused investments, and financial institutions are responding to this demand.

Q: What are the risks associated with ESG investment?
A: ESG investment can be riskier than traditional investment, as it may involve investing in companies that are not financially stable or that may be exposed to environmental or social risks.

Q: What is the potential impact of Florida's anti-woke law?
A: The law could deter financial institutions from investing in ESG-focused companies and could lead to higher capital costs for these companies.

Q: What can financial institutions do to comply with Florida's anti-woke law?
A: Financial institutions should carefully review the law and consult with legal counsel to ensure they are complying with all applicable requirements.

Q: What can investors do to support ESG investment?
A: Investors can invest in ESG-focused funds and ask their financial advisors about ESG investment options.

Call to Action

The Treasury Department's warning against Florida's anti-woke law is a reminder of the importance of ESG investment and the potential risks associated with restricting such investment. It is important for financial institutions, investors, and policymakers to work together to ensure that ESG investment continues to grow and thrive.