Oklahoma Court Says State Cannot Enforce Anti-ESG Law for Now

States are taking varied positions on environmental, social, and governance (ESG) policies as a tool for investing and risk management. Many businesses have adopted ESG policies and states’ responses to this practice have become politicized. Some states have enacted legislation restricting state agencies from investing in or doing business with companies based on their ESG policies, while other states have embraced the policies as a risk management tool.

States that have enacted or are considering enacting restrictive laws are Alabama, Arkansas, Florida, Idaho, Indiana, Kentucky, Louisiana, Minnesota, New Hampshire, North Dakota, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, and West Virginia.

Oklahoma passed the Energy Discrimination Elimination Act (EDEA) in 2022. The EDEA prevents state agencies from doing business with financial institutions that boycott traditional energy companies. The Act requires the state treasurer to identify offending financial institutions and distribute a list of those entities to state agencies. State agencies are then prohibited from conducting business with these listed financial institutions, except in specific cases, and are required to divest from any publicly traded securities in those institutions.

Last week, an Oklahoma court enjoined the enforcement of the EDEA, at least on a temporary basis. In a lawsuit filed by an Oklahoma taxpayer and beneficiary of a state pension plan, the plaintiff alleged the EDEA violated the state constitution and sought a temporary injunction against its enforcement. The Oklahoma EDEA would have required the state pension plan to divest itself of the publicly traded securities of identified financial institutions.

In granting the temporary injunction, the court found there was a substantial likelihood of success on two of the plaintiff’s claims. First, the court held that language in the EDEA was unconstitutionally vague (and therefore unenforceable). The court also found that the EDEA violated the exclusive benefits provision of the Oklahoma Constitution, which requires the state’s public retirement systems to be handled for the exclusive benefit of the participants and beneficiaries (and not for other purposes, including any political agenda).

The court order temporarily enjoins enforcement of the provisions of the EDEA by the state treasurer and his employees and agents. As the case develops, the court will determine whether to permanently enjoin enforcement of Oklahoma’s EDEA.

Steptoe & Johnson has a Securities Litigation Team that monitors developments affecting financial institutions, issuers of publicly traded securities, and investors. For questions about this alert, please contact the authors or other members of the Securities and Financial Services Litigation Team.