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Why Companies Should Watch Anti-ESG Litigation

Sept. 23, 2022, 8:00 AM

The increased corporate rollout of environmental, social, and governance policies in recent years is producing a rush of aggressive anti-ESG legislation in states such as Texas, Florida, Arizona, Indiana, North Dakota, Oklahoma, West Virginia, and Wyoming.

At issue are policies that discriminate, exclude, or extend special privileges. This trend will undoubtedly fuel state investigations, litigation, and even more legislation.

Texas Push

We have been on the front lines of one of the first ESG v. anti-ESG litigations in Texas, representing a Dallas-based firearms accessories company that had run afoul of its industrial landlord’s ESG policy.

In that case, the client sought to lease a new warehouse space to expand its business. The company located the ideal warehouse and fully negotiated favorable terms, and the client signed a long-term lease.

The owner of the warehouse—a large industrial property owner—agreed to the lease terms and was aware of and authorized the client’s proposed use for the warehouse facility. However, the owner was financially backed by a multinational private equity firm with an ESG policy that prohibited relationships with companies in the firearms industry.

Based on the directive from the investment firm, the warehouse owner backed out of the lease before the tenant moved in—leaving the client scrambling to find a new facility at the last minute that created serious operational issues for its business.

Complicating the situation was that the Texas legislature recently passed regulations that prohibit the state from doing business with companies that discriminate against firearm or fossil fuel companies.

Though our client was not a direct beneficiary of this anti-ESG legislation, the landlord did substantial business with the state of Texas.

Its discrimination against our client would have to be reported to the state and trigger the anti-ESG statute. The parties ultimately settled the dispute before litigation was filed, but the lesson was learned: anti-ESG is just as powerful as ESG.

Exclusionary Bar

Whatever the altruistic or civic motivations behind an ESG policy, those motivations must be balanced against whether an ESG policy is, at its core, discriminatory and exclusionary.

While ordinarily companies are free to do business with whomever they like, in today’s political climate, lines are being drawn in the sand in certain states that are implementing legislation to ensure that if the line is crossed, there are consequences.

Corporate decisions to boycott certain industries will soon lead to litigation brought by state attorneys general. At the time of publication, 17 different state legislatures had proposed or adopted anti-ESG legislation in an attempt to fight back against exclusionary policies.

In Texas, the legislature passed Senate Bills 13 and 19 to protect the firearms and fossil fuel industries from ESG discrimination by any company that does business with the state.

This includes banks that underwrite state and local bonds, private equity or hedge funds doing business with state pensions, property owners leasing property to the state, or vendors selling products or services to the state.

Industry Boycotts

Texas law prohibits Texas governmental entities from doing business with lenders and companies that boycott businesses in firearms and fossil fuels.

In response, the Texas comptroller required that companies contracting with the state of Texas certify that they don’t boycott fossil fuels or firearms companies, and won’t implement a policy to boycott such companies during the contract term.

Texas Comptroller Glenn Hegar recently published an initial list of companies that are now barred from working with the state.

Kentucky, Oklahoma, and West Virginia each passed legislation addressing boycotting of either the firearms or fossil fuel industry. Anti-boycott legislation has also been introduced in Arizona, Indiana, Idaho, Louisiana, Minnesota, Missouri, Ohio, South Carolina, South Dakota, Utah, and Wyoming.

Interestingly, Idaho and Minnesota’s proposed legislation adds anti-boycotting protections in mining, agriculture, lumber, and timber. Other states, such as Arizona, Indiana, and Florida, enacted legislation to prohibit consideration of ESG factors in the state’s investments.

In other words, certain states have codified that only pecuniary factors can be considered in investing the state’s funds.

In a related tactic, some states are now willing to use anti-ESG legislation to end special privileges for companies that engage in political advocacy using company dollars.

For example, Florida canceled Disney World’s special tax status because it opposed the state’s prohibition on teaching gender and sexual orientation to children below the third grade.

But this phase of anti-ESG legislation is just the tip of the iceberg. The next phase may see anti-ESG legislatures that attempt to grant a private right of action to fossil fuels or firearm companies that experience discrimination.

For example, imagine that a bank refuses to give a loan to a petroleum exploration company on the basis of the bank’s internal ESG policy. A legislature could theoretically grant a company a statutory right to sue the bank for discrimination.

If that happens and the legislation survives any constitutional challenges, then companies will either need to cease business in a state, abandon their ESG policies, or bear an enormous litigation risk.

The anti-ESG movement is in its infancy, but as legislatures slowly process the effects of ESG policies, companies should fully expect and prepare for an incremental rise in both legislation and litigation.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

R. Heath Cheek is a partner with Bell Nunnally in Dallas. As a trial lawyer, he serves as lead counsel on high-stakes litigation for Fortune 500 companies, startup businesses, and high-net-worth individuals.

Mason G. Jones is an associate with Bell Nunnally in Dallas. He focuses his practice on commercial litigation, and assists in complex litigation matters, including breach of contract, partnership, and employment disputes.