US States’ Climate Ambition Under Threat
Investors urged to “fill the gap” as Trump administration seeks to smother climate rules at the state level.
A wide-ranging federal review of climate-focused regulations and policies passed by US states will lead to extended legal battles, increasing uncertainty for consumers and investors.
An executive order issued earlier this month has instructed US Attorney General Pam Bondi to review climate-focused policies and regulations enacted by individual states, in a bid to clamp down on “state overreach”. She has until June to conduct the review.
It was issued in tandem with another executive order drafted to incentivise US industries and civilians to use coal. In 2024, solar and wind produced more US energy than coal.
“In our federal system, states have an important role to play in protecting the people who live within their borders, especially where the federal government has not acted under its own constitutional authority. But if the administration chooses to push against state prerogatives, it will make it that much harder for responsible state and local officials to address the climate crisis,” Rick Alexander, CEO of advocacy firm The Shareholder Commons, told ESG Investor.
“The financial threat to diversified long-term investors is so great that, if government steps away from addressing the climate crisis, filling that gap should be their top priority.”
New York and Vermont’s climate ‘superfund’ laws – which aim to make polluters pay for damages caused by extreme weather events – have been explicitly targeted, as well as California’s cap-and-trade system.
In March, fossil fuel executives convened at the White House and reportedly lobbied Trump to give them immunity from climate litigation.
The sector contributed almost US$100 million to Trump’s re-election campaign and affiliated political action groups.
Attack on investor freedom
The order gives Bondi free rein to identify laws that address climate change or other ESG risks in a way that limits the exploitation of domestic energy resources.
“It’s not clear yet whether the administration will go after a broader set of laws and regulations,” said Bryan McGannon, Managing Director of the US Sustainable Investment Forum (US SIF).
There is concern that California’s climate disclosure rules – already facing challenge from lobbyists – will be subject to the review. Similar climate disclosure initiatives are underway in the states of New York, Oregon, Illinois, and Washington.
Last year, the UN-convened Principles for Responsible Investment (PRI) published a policy briefing outlining the importance of state-level lawmakers continuing to drive sustainability action and investment in the US – irrespective of federal policy priorities.
It called on lawmakers to adopt a state-wide approach to enable responsible investment by promoting and encouraging aligned practices at the highest levels of government, as well as clarifying investors’ ability to incorporate material ESG-related considerations into investment decision-making and disclosures.
“President [Donald] Trump’s executive order is yet another attack on investor freedom and market stability,” said Ben Cushing, Director of the Sustainable Finance Campaign at US advocacy firm Sierra Club.
“By threatening to override state-level climate and sustainability measures, the administration is creating even more uncertainty for responsible investors who are trying to manage material financial risks, including those tied to climate change. Investors rely on transparency and long-term policy certainty to make smart decisions, and this kind of reckless interference only drives up risk and discourages growth in the clean energy sector in the US.”
Fighting back
Trump’s executive order is expected to be fought by climate-conscious states.
“The order alone [is unlikely to] deter states committed to reducing greenhouse gas emissions and renewable energy development,” said Andrew Otis, Partner at law firm Kramer Levin.
Earlier this year, the New York State Metropolitan Transportation Authority (MTA), alongside the New York State Department of Transportation and others, sued the federal Department of Transportation over its efforts to shelve plans for a congestion pricing scheme in New York City.
“The MTA has made clear that they will not rescind the congestion pricing scheme absent a specific court directing them to do so,” said Otis.
“The extent to which [other states push back] will depend on the specific actions taken by the attorney general in response to the executive order.”
The US Supreme Court has previously said that states have the fundamental authority and obligation to guard and protect the safety and health of their people under the US constitution.
State-level policy has assumed greater importance thanks to wider regulatory and legal developments. Last year, the US Supreme Court overturned the 40-year-old Chevron precedent, which had given federal agencies the ability to apply reasonable interpretation of ambiguous laws.
Last month, the US Securities and Exchange Commission voted to end its ongoing legal defence of rules requiring companies to disclose climate-related financial risks.
“While they [the Trump administration] probably can’t directly overturn the state laws, they can condition federal funding on whether the states keep the laws in place,” warned McGannon at US SIF.
As such, increased uncertainty and volatility in the coming months is likely unavoidable.
“If the [Trump administration’s] goal was to undercut American leadership, cede market share to foreign competitors, and stoke investor anxiety – it’s working,” said Cushing.
Experts encouraged investors to use their influence with portfolio companies to address the gap created by the Trump administration’s efforts to undermine climate action.
“Investors can use their rights to insist that companies operate within guardrails that protect the climate system by adhering to a carbon schedule consistent with the agreements reached in Paris,” said Alexander at The Shareholder Commons.
“Those investors depend on the earth’s environmental system to support their entire portfolios, and they can and should use their voting power, their investment choices, and any other tools at their disposal to protect that system – especially in the absence of effective governmental action.”
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