Federal Court Strikes Down Texas Anti-ESG Investment Law

In a defeat for state efforts to penalize ESG investing, in American Sustainable Business Council v. Hegar, a Texas federal court declared Senate Bill 13 (SB 13) — a Texas law targeting financial companies that “boycott” fossil fuels — unconstitutional under both the First and Fourteenth Amendments. The court granted summary judgment in favor of the American Sustainable Business Council and enjoined enforcement of the law’s divestment and procurement provisions. The decision is likely to be appealed. 

Texas SB 13 Background 

Enacted in 2021, SB 13 created a two-pronged barrier against ESG-minded financial firms. The law’s Divestment Provision required state pension funds and other governmental investment entities to divest from any financial firm that “boycotts energy companies.” Its Procurement Provision barred vendors with 10 or more employees from receiving state contracts worth more than $100,000 unless they verified that they would not “boycott” fossil fuel companies during the contract term. 

At the center of the law was its definition of “boycott energy company,” which broadly prohibited any action taken “without an ordinary business purpose” to “penalize, inflict economic harm on, or limit commercial relations” with fossil fuel companies. The Texas Comptroller was empowered to compile a “blacklist” of financial firms deemed to be boycotting, and firms that failed to respond to verification requests within 60 days were presumed to be boycotters.

The Court’s Decision 

Constitutional Overbreadth

A judge in the Western District of Texas held that SB 13’s sweeping “any action” language was the law’s fatal flaw. The court held that the statute’s definition of “boycott” was facially overbroad because it reached a “substantial amount” of constitutionally protected expression, including discussions of fossil fuel risks, publicly advocating against fossil fuel reliance, and associating with environmental advocacy organizations. 

The court drew heavily on prior rulings striking down Texas’ parallel anti-Israel boycott statute (HB 89), which contained nearly identical “any action” language. Both statutes, the court concluded, sweep far beyond commercial conduct into protected political speech and advocacy. Because the law’s infringement on protected speech was “substantial” in relation to its legitimate scope, the entire law was deemed unconstitutional and unenforceable. 

Vagueness

The court also ruled that SB 13 violated the Due Process Clause of the Fourteenth Amendment by requiring “men of common intelligence” to guess at what the law prohibits. All three definitional clauses, “refusing to deal with,” “terminating business activities with,” and “taking any action that is intended to penalize” were undefined and, the court said, “not susceptible to objective measurement or determination.” 

The “ordinary business purpose” exception compounded the confusion. Multiple blacklisted companies had asserted that their decisions were driven by ordinary business purposes, yet the Comptroller added them to the list anyway without offering any explanation. At the same time, the Comptroller publicly stated that companies could be removed from the blacklist simply by dropping their memberships in sustainable investing associations. This, the court found, was textbook “discriminatory and arbitrary” enforcement, the hallmark of an unconstitutionally vague statute. 

What You Should Know 

This ruling will likely embolden legal challenges to similar anti-ESG measures in other states that have adopted fossil fuel boycott statutes modeled on SB 13. Financial institutions and asset managers operating nationally should monitor developments closely, as the patchwork of state anti-ESG laws remains fluid and the prospect of appeal from this decision is high.

For now, Texas state pension funds and governmental entities are no longer bound by SB 13’s divestment mandates, and state vendors need not certify non-boycott status under the enjoined procurement provisions. Given how prior disputes have been litigated, we anticipate that Texas will appeal to the Fifth Circuit, where jurisdictional issues have previously derailed similar First Amendment challenges. 

Stay tuned for further developments. Members of the firm’s Environmental and Environmental, Social & Governance teams regularly monitor regulatory and court decisions affecting businesses and communities.