A business advocacy group sued Texas Comptroller Glenn Hegar and Attorney General Ken Paxton over a 2021 law that banned banks and asset managers from considering environmental, social and governance risks and opportunities in investment decisions.

The Texas law, known as SB 13, has served as a model for other Republican-leaning states that have since passed such laws with the help of conservative think tanks and right-leaning policy groups. Many Republican state officials have said the restrictions are needed to protect their oil and natural gas industries, while others have said ESG policies reflect a politically liberal agenda inconsistent with state values.

But the backlash against ESG investment policies now appears to be facing a backlash of its own.

The Aug. 29 lawsuit filed by the American Sustainable Business Council argued that the Texas anti-ESG law violates the First and 14th amendments of the US Constitution.

The group describes itself as a membership-based organization of companies, investors and business organizations representing more than 200,000 businesses that advocates for a "just and sustainable economy." A March 2024 study by the Texas Chamber of Commerce said municipalities in the state have paid $270 million annually in higher bond costs since SB 13 was enacted three years ago.

"SB 13 bars certain state investments and contracts with companies that take 'any action' ... intended to penalize, harm or simply limit commercial relations with fossil fuel companies and companies that rely on fossil fuels," the complaint said. "The sweep of this provision is contrary to the First Amendment, which protects speech and other expressive activities, even if a government does not like the content of that expression. In addition to these infringements on core constitutional rights, SB 13 is unconstitutionally vague under the Fourteenth Amendment because it encourages arbitrary enforcement and fails to give regulated entities fair notice of prohibited conduct."

Filed in the US District Court for the Western District of Texas, Austin Division, the lawsuit asked the court to declare SB 13 unconstitutional and to bar state officials from carrying it out. The Texas attorney general's office did not immediately return a request for comment Aug. 29 on the lawsuit.

"Laws like SB 13 not only inhibit economic growth and innovation but also set a dangerous precedent for the role of government in business affairs," Etho Capital LLC CEO Amberjae Freeman said in a statement. Etho Capital was one of two investment firms and members of American Sustainable Business Council named in the Texas lawsuit.

Elsewhere, a judge in Oklahoma in May put the state's law on hold after retired members of a public pension fund sued. And in Kentucky, the state banking association in 2022 sued the state over an ESG law allowing the attorney general to investigate banks' investment policies in a case that has yet to be resolved.

While toning down their public communication about ESG investment screens in recent years, financial industry participants maintain that they have a fiduciary responsibility to consider how climate change and social movements can affect investment portfolios. Large asset managers such as BlackRock Inc. in recent years have lost billions of dollars in contracts due to state anti-ESG policies.