How a Business Group is Challenging Texas Over Anti-E.S.G. Law

In a significant legal confrontation, a liberal business group has taken Texas officials to court, contesting a 2021 state law that prohibits state entities from engaging with investment firms accused of boycotting energy companies. The lawsuit, filed by the American Sustainable Business Council (ASBC) in the United States District Court in Austin, claims that the law, known as S.B. 13, infringes upon First Amendment rights by penalizing firms based on their “actual or perceived” political stances on fossil fuels.

The Controversy Over S.B. 13 and E.S.G. Investing

The Texas law, S.B. 13, specifically targets investment firms that incorporate environmental, social, and governance (E.S.G.) principles into their strategies, which may involve limiting investments in fossil fuel companies. The law has raised alarm among companies and advocates of E.S.G. investing, who argue that it restricts free market operations and punishes firms for taking environmental concerns into account.

E.S.G. investing has gained momentum over the past decade as investors increasingly recognize the long-term risks posed by climate change and other social and governance issues. However, states like Texas have responded with legislative pushback, driven by concerns that such investment strategies could undermine traditional industries, particularly the oil and gas sector, which is a critical component of Texas’s economy.

According to the policy research group Pleiades Strategy, a total of 20 states have enacted similar anti-E.S.G. laws. These measures reflect a broader conservative backlash against what is perceived as politically motivated investment strategies that prioritize environmental and social goals over financial returns.

Legal Grounds for the Challenge

The ASBC’s lawsuit names Texas Attorney General Ken Paxton and State Comptroller Glenn Hegar as defendants. The legal challenge asserts that the law violates the First Amendment by discriminating against firms based on their political views or perceived biases against fossil fuels. The ASBC argues that the law not only restricts the free speech of companies but also imposes significant economic costs on the state and its residents.

A key point of contention is that the law applies to firms on the basis of “vague and arbitrary standards,” as the lawsuit claims. The lawsuit cites the example of two of ASBC’s member companies, Etho Capital and Sphere, which were blacklisted in Texas after the passage of S.B. 13. These companies allege that they were not provided with a clear rationale for their inclusion on the blacklist, nor were they given a fair opportunity to challenge the designation.

Economic Impact of Anti-E.S.G. Legislation

Beyond the constitutional arguments, the ASBC’s lawsuit highlights the economic repercussions of the Texas law. According to a study commissioned by the Texas Association of Business, the state’s anti-E.S.G. laws have resulted in approximately $668 million in lost economic activity during the 2022-23 fiscal year. The study attributes these losses to reduced competition and increased costs for state entities that now face higher expenses for banking, investment, and financial services.

One of the most notable consequences of S.B. 13 was the decision by a Texas state fund for public schools to withdraw $8.5 billion from the investment giant BlackRock. BlackRock, under the leadership of CEO Laurence D. Fink, has been a prominent advocate for incorporating E.S.G. principles into investment strategies. However, Fink has recently distanced himself from the term “E.S.G.,” stating that it has become “weaponized” by politicians.

The Broader Implications for the Business World

The legal challenge in Texas is being closely watched by the business community, particularly in light of a similar case in Oklahoma, where an anti-E.S.G. law was successfully challenged and temporarily blocked by a judge earlier this year. The outcome of the Texas lawsuit could have far-reaching implications for the future of E.S.G. investing and the role of state governments in regulating business practices.

Robert Skinner, a partner in the securities litigation group at the law firm Ropes & Gray, emphasized that E.S.G. principles are not merely about making a positive impact on the planet but are integral to assessing material financial risks. “The risks imposed by climate change and other so-called E.S.G. risks are fundamental material financial risks that asset managers ignore at their peril,” Skinner noted.

The Road Ahead

As the lawsuit proceeds, it is likely to reignite debates over the role of government in business and the balance between economic interests and environmental responsibilities. Texas Comptroller Glenn Hegar has already defended the law, arguing that it protects the state’s vital oil and gas industry from what he describes as a “radical environmental agenda.”

However, the ASBC contends that the law sets a dangerous precedent for government interference in private business affairs. Amberjae Freeman, CEO of Etho Capital, one of the companies blacklisted under S.B. 13, expressed concern that the law could undermine the ability of businesses to operate based on their values and the long-term interests of their shareholders.

The case will test the limits of state power in regulating investment strategies and could influence how other states approach the intersection of business, politics, and environmental policy. As the world grapples with the urgent need to address climate change, the outcome of this legal battle may shape the future of responsible investing in the United States and beyond.