Texas Fossil Fuels Ruling May Be a Step Back for ‘Anti-ESG’ Laws

A Texas federal court has upheld a challenge to a Texas statute barring state public entities from investing or contracting with companies that seek to reduce reliance on fossil fuels—a potential reprieve for environmental, social, and governance supporters. The decision in American Sustainable Business Council v. Hegar could make it more difficult to frame constitutionally valid “anti-ESG” legislation, which the Texas statute apparently was designed to be.

Senate Bill 13 and the ensuing litigation mark another step in the debates over ESG issues, which have become a cause célèbre or a bête noire for different ends of the political spectrum. The statute, signed into law in June 2021, contains two basic provisions:

• It prohibits certain state entities (state pension funds) from investing in, and requires them to divest from, financial companies that “boycott energy companies.”
• It prohibits governmental entities from contracting for goods or services with companies that don’t confirm in writing that they don’t and won’t “boycott energy companies.”

The decision by the US District Court for the Western District of Texas emphasizes that any legislation that might affect expression of views on public or noncommercial matters must be sufficiently narrow and clear to withstand constitutional scrutiny. That principle extends to other politicized issues. For example, the court relied on several cases holding unconstitutional Texas’ “‘boycott Israel’ law,” which prohibited “‘any action that is intended to penalize, inflict economic harm on, or limit commercial relations’ with Israel.”

The lawsuit was filed by plaintiff American Sustainable Business Council, or ASBC, a membership organization representing more than 200,000 businesses “in advocating for and advancing sustainable business practices.” The Texas Comptroller allegedly placed the investment funds of two ASBC members on the state’s “blacklist” for “boycotting energy companies.”

ASBC contended that the Texas law is unconstitutional because it “impermissibly infringes rights of free speech and association under a scheme of politicized viewpoint discrimination, based on no legitimate state interest.” ASBC also said the law’s key terms are “undefined and vague” and don’t give regulated entities “adequate notice of their prospective exclusion from competition for state investments and contracts.”

US District Court Judge Alan D. Albright, an appointee of President Donald Trump, granted partial summary judgment for ASBC, held that the statute is unconstitutional under the First and Fourteenth Amendments, and enjoined implementation and enforcement of the law.

The court first ruled that the statute violates the First Amendment because it is facially overbroad. Rejecting defendants’ argument that the statute applies only to unprotected “commercial conduct,” the court held that the definition of “boycott energy companies” penalizes companies “for all manner of protected expression concerning fossil fuels.”

The court held that the term “boycott energy companies” as defined in the statute could encompass “speaking about the risks posed by fossil fuels, advocating against reliance on fossil fuels, and associating with like-minded organizations—all forms of expression in which ASBC’s members” regularly engage.

The court also concluded that the statute was unconstitutionally vague, in violation of the Due Process Clause of the Fourteenth Amendment. The statutory definition of “boycott energy companies” “fails to provide a reasonable opportunity to know what conduct is prohibited” and “invites—and has in fact already led to—discriminatory enforcement.” The statute therefore doesn’t give reasonable opportunities for people to know what is and isn’t allowed and doesn’t have clear compliance standards.

SB 13 was an overt attempt to address and influence investing and contracting. While some governmental entities and financial firms have sought to promote ESG considerations as relevant investment criteria due to perceived long-range financial impacts and sustainability concerns, others have fought to exclude those considerations from financial decision-making.

The ASBC ruling focuses on the speech and expression burdens that a state may or may not impose on those entities. It doesn’t take sides on the substantive issue of the extent to which financial professionals can or should consider environmental, social, or other allegedly “nonfinancial” objectives in investment decision-making.

But SB 13 illustrates how governmental efforts to restrict those considerations can interfere with financial professionals’ ability to do their jobs as they see fit. Some professionals and investors across the political spectrum have complained that anti-ESG edicts have hampered their ability to use their best judgment to generate financial returns.

And in a suit brought by the Securities Industry and Financial Markets Association, an Oklahoma court enjoined enforcement of an Oklahoma statute blocking government retirement systems from investing in companies or funds that allegedly boycott energy companies for not meeting environmental standards beyond those prescribed by federal and state law.

In light of the political considerations that appear to have motivated the Texas statute’s enactment, an appeal to the US Court of Appeals for the Fifth Circuit seems likely. Stay tuned to see how SB 13 keeps playing out in court.

The case is American Sustainable Business Council v. Hegar, W.D. Tex., 1:24-CV-01010-ADA, opinion 2/3/26.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

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Jonathan Richman is a partner in Brown Rudnick’s white collar defense, investigations, and compliance practice group.

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