Constitutional challenge to Texas anti-ESG law filed in federal court

A business group filed a lawsuit Thursday challenging the constitutionality of a 2021 Texas law that punishes banks and other financial firms for "boycotting" the fossil fuel industry.

The case, brought by the American Sustainable Business Council against Texas Comptroller Glenn Hegar and Attorney General Ken Paxton in federal court in Austin, claims the law violates free speech and association rights protected under the First and Fourteenth Amendments of the U.S. Constitution.

The lawsuit comes after enforcement of a similar law enacted by Oklahoma in 2022 was halted in July by a state judge who found it violated that state's constitution.

Texas was an early enactor of anti-environmental, social, and governance laws that have spread to other states.

Two Texas laws, including Senate Bill 13 targeted by the lawsuit, have led to the blacklisting of 19 financial firms, including municipal bond underwriters, for "boycotting" or "discriminating" against the fossil fuel or firearm industries. The laws call for divestment of public pension and other assets and prohibit governmental contracts worth $100,000 or more with banned firms.

"SB 13 is not just a misguided policy; it is an unconstitutional attack that stifles free speech and punishes businesses for prioritizing responsible investments," David Levine, president of the American Sustainable Business Council, said in a statement. "By challenging SB 13, we aim to protect the rights of all businesses to operate freely and responsibly."

The flagship investment funds of two of the council's members, Etho Capital and Our Sphere, were blacklisted by the Texas comptroller, according to the lawsuit.

The complaint also points to a Texas Association of Business study that found less competition in the municipal bond market for Texas debt as a result of the two laws "is leading to higher interest costs, which in turn increases the debt burdens of local governments, straining resources and levying additional costs on Texas taxpayers."

Hegar, who is required to maintain a list of entities his office determines to be "boycotting" energy businesses, said "the purported First Amendment lawsuit" seeks to undermine the state's sovereignty and force Texas and its taxpayers to invest money "in a manner inconsistent with their values and detrimental to their own economic well-being."

"Texas has taken a very open, transparent and methodical approach, so it is ironic that this left-wing group suing Texas is hiding their true intent: to force companies to follow a radical environmental agenda that is often contrary to the interests of their shareholders, and to punish those companies that do not fall into lockstep and put politics above earnings," he said in a statement.

There was no immediate comment from Paxton, who put several firms, including Bank of America (BAC), JP Morgan, Morgan Stanley (MS), RBC Capital Markets, and Wells Fargo (WFC) under review in October over their involvement with the Net Zero Alliance, which seeks a transition to net-zero greenhouse gas emissions by 2050. In January, the attorney general banned Barclays (JJCTF) from underwriting debt.