A liberal business group sued Texas officials this week in a major challenge to a 2021 law that bars state entities from doing business with investment firms that the state comptroller says are boycotting energy companies.
The suit, filed by the American Sustainable Business Council in United States District Court in Austin, argues that the law violates the First Amendment because it prohibits doing business with firms on the basis of their “actual or perceived” political views on fossil fuels.
The law prohibits state entities like retirement funds from placing investments with firms it says have enacted boycotts by including environmental principles in their investment strategies. Twenty states have passed such laws in recent years, according to a tally by Pleiades Strategy, a policy research group.
The laws were part of a backlash in some states against a surge of interest over the past decade in what’s known as E.S.G. investing, or making investment decisions that take into account environmental, social and governance issues like pollution and climate change, among others. A similar anti-E.S.G. law in Oklahoma was successfully challenged in court this year and has been temporarily blocked by a judge.
The Texas suit names the state attorney general, Ken Paxton, and the state comptroller, Glenn Hegar, as the defendants. In a statement, Mr. Hegar assailed the suit, calling it an attempt “to force companies to follow a radical environmental agenda that is often contrary to the interests of their shareholders.”
He added that the group had “ignored the critical role” that the oil and gas industry plays in Texas as projections about future demand continue to rise. A June report by Goldman Sachs concluded that worldwide demand for oil would grow for the next decade, an assessment it attributed to slow sales of electric vehicles and rising consumption.
But the lawsuit argued that the Texas law, S.B. 13, and a related one concerning firearms had actually cost Texans millions of dollars in lost economic activity by restricting their investments. It cited a study conducted for the Texas Association of Business that found the laws cost Texas about $668 million in lost economic activity in the 2022-23 fiscal year, reduced competition and increased the costs that state entities had to pay for banking, investment and finance services.
Perhaps the most high-profile consequence of S.B. 13 came in March, when a Texas state fund for public schools said it would withdraw $8.5 billion from the investment giant BlackRock to comply with the law. BlackRock’s chief executive, Laurence D. Fink, was a major early promoter of incorporating E.S.G. principles into investment strategies, but has said that he stopped using the term because politicians had “weaponized” it.
The American Sustainable Business Council calls itself a “movement builder” and counts Patagonia and Ben & Jerry’s among its members. It is being represented by the Washington-based legal advocacy group Democracy Forward in Washington, along with two other law firms.
Two of the council’s other members, the investment funds Etho Capitol and Sphere, were blacklisted in Texas after SB-13 passed, the complaint said, “based upon the comptroller’s consideration of protected speech and application of vague and arbitrary standards.” The companies said they were not given a clear explanation of why they were put on the list or a meaningful process to contest the designation.
In a statement, the chief executive of Etho Capitol, Amberjae Freeman, said that the law set a “dangerous precedent for the role of government in business affairs.”
Robert Skinner, a partner in the securities litigation group at the law firm Ropes & Gray, said that anti-E.S.G. laws were based on a false premise, namely that E.S.G. is just about funds that claim to make a positive impact on the planet, at the expense of traditional measures of business success like profitability. He said investment professionals routinely look at a company’s environmental, social and corporate-governance policies as a part of their risk analysis.
“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,” he said.