A group of Texas lawmakers and the Houston city controller said state officials are interfering in free markets and tarnishing the state's pro-business reputation by banning investment firms that have environmental, social and governance policies.
Texas adopted legislation in 2021 that prohibits cities, counties and state agencies from contracting with banks that screen investments for ESG risks and opportunities. Such investment criteria are among multiple factors that asset managers and other financial services providers consider when placing money.
A business advocacy group in August sued Texas Comptroller Glenn Hegar and Attorney General Ken Paxton over SB 13, a law that would later serve as a model for other Republican-dominated states seeking to negate ESG policies. Many states said they wanted to protect the fossil fuel industry against divestment over climate risks, even though BlackRock Inc. and other large firms banned by such policies continue to invest in companies with oil and natural gas holdings.
"Being anti-anti-ESG is not the same as being anti-oil and gas industry," Sen. Nathan Johnson, a Democrat representing the Dallas area, told reporters during a Sept. 18 briefing about the legislation and lawsuit. "We're for non-interference in markets. It's disturbing there is this growth of government ... in a state that prides itself of not interfering, at least in business."
The event was organized by the legal counsel for the American Sustainable Business Council, the group challenging SB 13 in the US District Court for the Western District of Texas, Austin Division. The lawsuit asked the court to declare the law unconstitutional and to bar state officials from carrying it out.
After Texas in 2022 published a list of financial institutions no longer welcome in the state, service fees rose and the state's financial services market became less competitive, Houston City Controller Chris Hollins said at the briefing.
"If this pattern continues we will tarnish our reputation as a state that's open for business and destroy what we know as the Texas miracle," Hollins said. "It hampers cities like Houston when it comes to our ability to secure funding for crucial infrastructure investment at the best cost for taxpayers. It means higher borrowing costs and higher property taxes for Houstonians."
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.
Rep. Salman Bhojani, a private equity fund manager and Democrat serving Fort Worth, said the Texas anti-ESG legislation is already hampering investments in the rapidly growing state.
"Texas is the eighth-largest economy in the world; how do you think we will continue on this trajectory if we interfere and limit access to capital?" Bhojani said. "We are already guided by our clients' values — making investment decisions that are both profitable and focused on sustainability."
It is not the government's role to "impose political ideologies" on business decisions, the lawmaker added.
Litigation growing
Hegar, the state comptroller named in the Texas lawsuit, has called the litigation absurd.
"Texas has taken a very open, transparent and methodical approach, so it is ironic that this left-wing group suing Texas is hiding their true intent: To force companies to follow a radical environmental agenda," Hegar said in an Aug. 29 statement. "During a time when experts are revising long-term fossil fuel demand projections drastically upward, these groups continue to shove their radical agenda onto consumers and ignore the critical role this sector plays."
In the past year, the GOP backlash against ESG has run into growing resistance from courts, banks and business groups concerned about the anti-ESG movement's economic impact.
In August, the US District Court of the Western District of Missouri said two state anti-ESG laws targeting brokers and investment advisers were unconstitutional. A judge in Oklahoma put that state's anti-ESG law on hold in May 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.