In a recent legal development, the American Sustainable Business Coalition, a progressive business group, has filed a lawsuit against the state of Texas over a 2021 law that limits state investments in companies deemed to be "boycotting" the fossil fuel industry. The group argues that Senate Bill 13 (SB 13) infringes upon the First and Fourteenth Amendments by engaging in viewpoint discrimination and denying companies due process.

The lawsuit targets Attorney General Ken Paxton and Comptroller Glenn Hegar, seeking a declaration that SB 13 is unconstitutional and a permanent injunction to prevent the state from enforcing it. The group, in its court filing, suggests that the law contradicts Texas' reputation as a business-friendly state that allows companies to operate as they see fit.

Often referred to as the "anti-ESG law," SB 13 mandates that state entities, including state pension funds and the K-12 school endowment, divest from companies that have reduced ties or distanced themselves from the oil and gas sector. Texas officials consider such companies to be hostile towards the fossil fuel industry.

The legislation was enacted with the intention of safeguarding local oil and gas companies, while pushing back against Wall Street investors who have withdrawn financial support due to climate risk concerns. These investors have faced pressure to divest from fossil fuels, which contribute significantly to the climate crisis.

Texas Permanent School Fund, Austin, made headlines when it severed ties with BlackRock, which managed a substantial portion of its $52.3 billion endowment. BlackRock is among the more than 370 investment firms and funds that have been blacklisted by Texas, including those associated with prominent banks like Goldman Sachs and J.P. Morgan. The company disputed its designation as a fossil fuel "boycotter," citing its sizable investments in Texas energy companies.

According to the statute, a "boycott" is defined as taking actions that intend to penalize, harm economically, or restrict commercial relations with a fossil fuel company without an ordinary business purpose. Additionally, state agencies are now prohibited from conducting business with any company unless it confirms that it does not boycott energy companies. The state comptroller is responsible for compiling and maintaining a blacklist of companies based on publicly available information and written verification.

Comptroller Hegar criticized the lawsuit, calling it an "absurd" attempt to force Texas and its taxpayers to invest against their own values and economic well-being. He accused the group of trying to impose a radical environmental agenda on companies, regardless of the interests of their shareholders.

The American Sustainable Business Coalition argues that climate change poses significant physical and financial risks, justifying efforts to reduce carbon emissions. They contend that SB 13 was enacted by Republican lawmakers to curb what they perceived as a growing movement of fossil fuel discrimination. The law, according to the group, violates the rights of free speech and association by enabling Texas officials to penalize companies that fail to align with the fossil fuel industry.

The lawsuit further claims that the law violates due process, as its vague language allows for arbitrary enforcement and denies blacklisted companies a fair opportunity to contest their designation. The American Sustainable Business Coalition cites instances where prominent climate-focused firms, Etho Capital and Sphere, had their flagship investment funds blacklisted by Texas.

SB 13, which penalizes companies for their energy policies and association with certain business groups, appears to conflict with Texas' modern economy, which prioritizes sustainable investing and business practices, according to the lawsuit.

As the legal battle commences, the outcome of the lawsuit will have implications for the state's ability to regulate its investment activities and its approach towards companies aligned with reducing fossil fuel reliance.