Texas Anti-ESG Law Falls, Financial Markets Hang in the Balance

Texas Senate Bill 13 ("SB 13"), enacted in June 2021 and authored by State Senator Brian Birdwell, was among the first U.S. laws targeting Environmental, Social, and Governance ("ESG") investing practices. (Mollie Duckworth, Latham & Watkins LLP). At its core, SB 13 prohibited Texas public entities from investing in or contracting with companies deemed to "boycott" the fossil fuel industry. (Texas Policy Research). ESG policies “aim to promote sustainable and responsible business practices” in addition to the previously paramount financial bottom line. (Deloitte). ESG practices trace their roots back to the early 1960s, led by social activists and religious groups seeking to spark corporate responsibility on ethical investing. (Thomas J. Billitteri, CQ Press). Sustainability pioneers like John Elkington popularized the “triple bottom line,” or the ideas that corporations must account for their societal and environmental impacts in addition to their profitability. (John Elkington, Harvard Business Review). Today, ESG practices are performed across industries, focused on issues, “ranging from human capital and compensation issues, to climate change, deforestation, and water and waste management, to supply chain management.” (Jurgita Ashley, Harvard Law School Forum on Corporate Governance). In the energy context, ESG policies condition investing on environmental and social criteria, threatening states like Texas by disfavoring their core oil and gas industries based on ideological grounds. (Ayden Runnels, The Texas Tribune). Thus, the law represented a “high profile” effort to combat ESG practices that the Texas Senate viewed as a threat to the state’s energy sector. (Texas Policy Research). This discussion explores SB 13’s implications, the recent ruling of its unconstitutionality, and the market’s incipient response to SB 13’s discontinued enforcement.

On February 4, 2026, U.S. District Judge Alan Albright held in American Sustainable Business Council v. Hegar that SB 13 violates the First and Fourteenth Amendments, rendering the law unenforceable and enjoining Texas officials from implementing it. Am. Sustainable Bus. Council v. Hegar, 818 F. Supp. 3d 866, 869 (W.D. Tex. 2026). The American Sustainable Business Council (“ASBC”), who represents more than 200,000 businesses advocating for sustainable business practices, brought the case. Id. ASBC successfully argued SB 13’s divestment provision violated the First Amendment, and the term “boycott” was unconstitutionally vague under the Fourteenth Amendment. Id. For the time being, large banks and other asset managers are caught in limbo. (Jonathan Stempel, U.S. News & World Report). While the ruling means that organizations are now free to speak out on climate change, Texas Comptroller Kelly Hancock is adamant the state will appeal, viewing the ruling as an overreach that threatens Texas’s ability to protect its core energy sector. Id.

The law’s real-world consequences were severe from the outset. When SB 13 was enacted in 2021, Texas compiled a “blacklist” that excluded companies including HSBC Holdings and Credit Suisse from state investment, leading major financial institutions to abandon the Texas market. (Leah Garden, Trellis). As major players left the market, reduced competition allowed smaller firms to increase borrowing costs, imposing an additional “$300 million - $500 million [on Texas cities] in interest on $32 billion in bonds through April 2022.” Id. Upon enactment, SB 13 compelled certain state pension funds to divest from asset managers Texas determined were “boycotting” the oil and gas industry. Id.

Few cases better illustrate private equity firms’ frustration than BlackRock’s. In March 2024, three years after SB 13’s enactment, Texas determined that BlackRock was boycotting the oil and gas industry which prompted the Texas School Board Fund to terminate its $8.5 billion investment contract. (Isla Binnie, Reuters). Exemplifying the arbitrary enforcement Judge Albright cautioned against, Blackrock pointed to its $120 billion in investments in Texas energy companies and denied any boycott. Id. If Judge Albright’s decision is affirmed on appeal, firms previously excluded from the market may reenter, restoring competition and easing the elevated costs Texas cities experienced under SB 13’s enactment.

As stated, SB 13 prohibited Texas entities from investing in or contracting with companies deemed to "boycott" fossil fuels — a definition so broad that Judge Albright found that it inevitably captured constitutionally protected speech. Id. The ruling reflects Judge Albright’s consistent emphasis on preventing compelled speech, avoiding unconstitutional vagueness, and prohibiting prior restraints without adequate procedural safeguards as evidenced by decisions such as Book People, Inc. v. Wong, which struck down a Texas book rating law as an unconstitutional restraint on free speech. Book People, Inc. v. Wong, 91 F.4th 318, 324 (5th Cir. 2024). Regarding the First Amendment claim, Judge Albright reasoned that SB 13 fell into a category of statutes that appear to burden only non-constitutionally protected activities, but in practice restricts some activities protected by the First Amendment. Am. Sustainable Bus. Council v. Hegar, 818 F. Supp. 3d 866, 869 (W.D. Tex. 2026). Specifically, Judge Albright highlighted activities such as speaking publicly about risks posed by fossil fuels and associating with sustainable energy organization as protected First Amendment activities that would otherwise be barred by SB 13. Id. He also relied on a similar ruling involving Texas’s “boycott Israel” law, in which a court found the phrase "any action" as too broad to be limited to unprotected conduct. Id. Regarding the Fourth Amendment claim, Judge Albright further reasoned that SB 13 was unconstitutional because “men of common intelligence must necessarily guess at its meaning.” Id. Judge Albright provided terms such as “penalize” and “limit commercial relations” as undefined or unreasonably vague.  Id. He noted that, to his point, this lack of definition for key terms had already led to arbitrary enforcement.  Id.

For now, financial firms previously excluded from Texas markets may reenter and organizations remain free to advocate on climate change issues without fear of state retaliation. Whether this freedom endures depends on the Fifth Circuits decision on appeal, a decision many states with similar anti-ESG legislation will be awaiting.