Earlier this month, the Kentucky Bankers Association and its subsidiary Hope of Kentucky, LLC (Hope) sued Kentucky Attorney General (AG) Daniel Cameron in Kentucky state court to enjoin and declare unlawful Cameron’s recent efforts to investigate the use of environmental, social, and governance (ESG) data in financial decision-making.

The association is a nonprofit trade association with approximately 150 member banks representing virtually the entire Kentucky banking industry. Hope is a for-profit company dedicated to financing affordable multifamily housing projects. The two entities filed their lawsuit against Cameron on October 31 in Franklin County Circuit Court, seeking an injunction preventing Cameron from enforcing the subpoenas and civil investigative demands (CIDs) that he issued to six national banks earlier that month. Cameron sought removal of the case to federal court in the Eastern District of Kentucky on November 10.

Cameron’s CIDs targeted members of the Net Zero Banking Alliance (NZBA) — a group of banks dedicated to “lending and investment portfolios with net-zero emissions by 2050” — seeking all documents related to their use of ESG metrics in investment practices to investigate possible violations of Kentucky’s state consumer protection act and federal antitrust law. In their three-count complaint, the association and Hope allege that by issuing the CIDs, Cameron exceeded his statutory authority under state law, violated the companies’ First Amendment free speech and association rights, and acted inconsistently with recently passed Kentucky Senate Bill 205, which provides particular procedures for state actions against companies engaging in alleged energy sector boycotts.

It is important to note that Cameron’s actions are not unique. Rather, they are part of a growing trend among AGs and lawmakers around the country scrutinizing the use of ESG metrics in the banking and financial services industry, claiming that the metrics violate state consumer protection laws, fiduciary duties of investors, antitrust laws, and even laws designed to protect the nation of Israel. State treasurers have also blocked firms from bond offerings, barred big banks from government contracts, and pulled investments from asset managers over their ESG plans. And state legislatures have introduced bills designating ESG plans as disfavored state investments, and redefining fiduciary duties to prevent the boycott of fossil fuel companies by prohibiting consideration of ESG investment strategies. Meanwhile, the federal government has yet to clarify its stance on ESG.

As evidenced by this lawsuit, some industry leaders are taking matters into their own hands and asking courts to decide the issue. If it proceeds, this lawsuit could force Cameron to provide further legal grounds for his challenges to ESG, and force the industry to defend the merits of ESG investing. Importantly, provided AG Cameron successfully removes the case, this suit may give a federal court the first opportunity to speak directly to the merits of ESG investing—potentially setting an industry-changing precedent.

Our Take

Companies implementing ESG plans, state regulators, and investors should monitor this case closely. If the association and Hope prevail, it will deal a significant blow to state efforts to target the use of ESG metrics, while providing much-needed legal support for their continued use. If the court sides with Cameron, however, it could signal a green light to numerous other AGs currently considering similar challenges. Either way, this case may bring much-needed clarity on the legality of ESG investing.