A Texas law that created a blacklist of asset managers accused of boycotting the fossil fuel industry is being challenged by a group of progressive businesses that counts Ben & Jerry’s and Patagonia among its members.
That lawsuit, filed last week in US District Court for the Western District of Texas Austin Division, represents the latest and potentially most consequential pushback against anti-ESG laws passed in recent years by numerous states. Such laws have sought to prohibit governments or public pensions from doing business with companies that avoid investing in fossil fuels or that use environmental, social, or governance criteria in their processes.
State leaders that have supported such laws have cited fiduciary concerns over not investing in oil. Opponents of the anti-ESG laws have said the laws are thinly veiled efforts to protect the oil business at the expense of taxpayers and retirement savers.
And the laws have been perplexing for asset managers, as firms such as BlackRock, State Street, and Vanguard have been prime targets, even as they are major investors in the fossil-fuel business. BlackRock, for example, is one of the companies named in Texas’ list, despite having at least $120 billion invested in Texas energy companies.
That firm, like other big asset managers, also appears to be less supportive of shareholder resolutions focused on oil and gas than it had been in the past.
Some of the other 16 companies named on Texas’ list include BNP Paribas, HSBC, Impax Asset Management, Schroders, and UBS. But the state also blacklisted mutual funds and ETFs from dozens of other asset managers, totaling more than 350 US-domiciled products.
“We are quite comfortable with our position that the fossil fuel industry is not a long-term value proposition in a world that faces a climate crisis,” said Julie Gorte, senior vice president for sustainable investing at Impax Asset Management.
However, “I don’t think we had any or very many clients in Texas that were affected by this… It didn’t have a huge business consequence for us.”
The recently filed lawsuit against Texas Comptroller Glenn Hegar and Attorney General Ken Paxton, brought by the American Sustainable Business Council, alleges that the state’s SB 13 law is unconstitutional because it violates free speech, is vague, and impedes due process.
When asked whether the American Sustainable Business Council would pursue lawsuits over other state anti-ESG laws, a spokesperson for the group representing it in court, Democracy Forward, said in an email that it is focused on the individual lawsuit and that it “evaluates each legal opportunity on a case-by-case basis.”
The claims resemble ones in a lawsuit brought late last year against Oklahoma over a similar law. The judge overseeing that case in May granted a temporary injunction on enforcement of the Oklahoma Energy Discrimination Act of 2022, finding that the plaintiff is likely to succeed on claims of violation of exclusive benefit and vagueness. The court did not approve the injunction based on freedom of speech claims, though those are allowed to proceed.
In the order, the judge noted an estimate from the Oklahoma Public Employees Retirement board that implementing divestment from companies on the blacklist would cost $9.7 million.
In Texas’ case, a report by the Texas Association of Business found that the state’s anti-ESG laws cost it $669 million in lost economic activity in fiscal 2022 to 2023, as well as $181 million less +in annual earnings, more than 3,000 jobs and $37 million in tax revenue.
Asset managers use ESG factors to help identify opportunities and risks, Gorte said. Strategies that exclude fossil fuel investments can underperform in certain markets, but it’s notable that oil and gas companies account for only a small fraction of the proportion of the S&P 500 that they did decades ago, she said.
It’s also interesting that First Amendment claims are being used in the lawsuits against state laws, as that argument has been employed by opponents of federal rules around ESG, she said. That includes the SEC’s climate-disclosure rule for publicly traded companies.
“They turned the argument on its head, taking it back to the people who are essentially forcing people to invest in oil [and] guns.”
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