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New ESG Requirements for Banks that Hold Public Funds May Raise Challenging Compliance Issues

Much ink has been spilled about ESG laws and regulations targeted at the investment of public funds, and rightfully so.  Yet, there has been little discussion of novel requirements imposed on banks that simply hold state or local funds as depository institutions. To hold such funds, banks typically must receive state or local approval by going through a designated regulatory process.  What was once squarely within the realm of the mundane has now become another flashpoint in the evolving ESG debate. New York City and Florida are at the forefront of this new conflict—on opposite sides of the spectrum—and have put in place enhanced laws and regulations mandating that ESG or anti-ESG requirements be met in order for banks to continue to hold public funds.

In February of this year, New York City’s Banking Commission announced that in order for banks to be eligible to hold city funds, they must provide detailed plans and steps to combat discrimination in their operations.  For example, to hold New York City funds, banks must certify that the bank’s board of directors “has established and will adhere to a policy of hiring and promotion . . . without regard to race, color, religion, religious affiliation, sex, sexual orientation, national origin, marital status, disability or age.” NYC Rules, Tit. 22 §1-03.  New York City Mayor Eric Adams emphasized that “financial institutions are critical pillars of our communities, and we must demand the highest standards from any bank that is entrusted with public funds.” NYC Banking Commission Announces Measures to Ensure City’s Designated Banks More Accountable to Public, City of New York (Feb. 10, 2023).  Mayor Adams continued that “[t]hese new steps will ensure the Banking Commission is designating only those banks that have shown that they can protect taxpayer money and that are committed to promoting equity.” Id.  In May, the Banking Commission designated twenty-six banks to receive deposits from city agencies, while voting against five banks that failed to submit anti-discrimination plans, some of which at the time of the vote were holding city funds.

Shortly thereafter, Florida Governor Ron DeSantis signed anti-ESG legislation, known as HB3, into law.  Much like other states with similar laws, HB3 has far-reaching requirements that seek to restrict the use of ESG factors in the investment of state and local funds.  HB3, however, also creates a significant attestation requirement that applies to any “qualified public depository” or QPD, i.e., any bank that holds Florida public funds. 

Florida’s attestation requirement applies to the 75+ banks that currently hold the QPD designation and any bank seeking such designation.  It requires QPDs to confirm that they are not “discriminating” or “denying or canceling . . . services” to any person on the basis of a long laundry list of asserted ESG factors, which it designates as an “unsafe and unsound practice.” Fla. Stat. §280.02 (effective July 1, 2023). Among other factors, QPDs must attest to not discriminating on the basis of a person or entity’s political opinions or affiliations, business sector (including the distribution of firearms, or involvement with fossil fuels), or any non-quantitative, non-impartial, or non-risk-based factor. Id.

Once the law is effective, banks will need to file attestations on an annual basis to retain their status as a QPD.  Preparing such attestations will undoubtedly require significant work and will likely necessitate an internal review of the reasons for the provision or denial of services.  Additionally, murky questions loom large.  For example, whether any of a bank’s services are provided on the basis of “[a]ny factor [that] it is not quantitative, impartial, or risk-based” is left open-ended in HB3 and certainly could be subject to competing views.  Although time will likely help banks better understand HB3, and further state guidance could potentially be in the offing, any compliance errors—inadvertent or not—could be costly.  A failure to comply with HB3 may lead to suspension or disqualification as a QPD, civil fines, or lawsuits by the Attorney General of Florida.

All of this provides a window into the future.  More states will undoubtedly impose ESG or anti-ESG requirements on banks holding public funds.  This, in turn, may lead to a conflicting landscape of “red” and “blue” banking, creating fertile ground for disputes and potentially intractable compliance challenges.  Diligent assessment of any state requirements and careful legal counsel will be needed to minimize potential risks and navigate developments in this area.

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Keith M. Kollmeyer is a Member at Mintz who advises financial institutions in complex litigation and regulatory matters involving structured financial products and consumer financial products, with a particular emphasis on matters involving asset-backed securities (ABS). He represents clients in high-stakes cases in state and federal courts in New York and Delaware.
Jacob H. Hupart is Co-Chair of the ESG Practice Group and a Member in the firm’s Litigation Section. He has a multifaceted litigation practice that encompasses complex commercial litigation, securities litigation — including class action claims — as well as white collar criminal defense and regulatory investigations. His clients sit in a variety of industries, including energy, financial services, education, health care, and the media.

Ellen Shapiro


Ellen Shapiro focuses her practice on complex commercial litigation and securities litigation, including shareholder class actions and opt-outs. She represents companies in the life sciences and in other industries and also maintains an active pro bono practice.