Texas officials seek dismissal of constitutional challenge to anti-ESG law

The Texas state comptroller and attorney general asked a federal court on Friday to dismiss a lawsuit challenging the constitutionality of a 2021 law that bans governmental contracts with banks and other financial firms determined to be "boycotting" the fossil fuel industry.

The filing asserts plaintiff American Sustainable Business Council lacks standing to bring the complaint and that sovereign immunity bars the claims made against defendants Comptroller Glenn Hegar and Attorney General Ken Paxton. It also contends the complaint's violation of free speech claim fails because the First Amendment does not apply to the law's procurement provision.

Bloomberg News

"Neither refusing to deal with a counterparty nor terminating business activities are expressive conduct protected by the First Amendment," according to the filing.

"The First Amendment simply does not give plaintiff a wholly unfettered right to participate in the state's contracting process while participating in economic discrimination that undermines its economy," it added.

The defendants' response said the oil and natural gas industry directly contributed $360.7 billion to the Texas economy in 2022 and the law "ensured that large government contracts do not become avenues through which tax dollars contribute to boycotts" of that industry.

The council's response to the motion to dismiss is due by Oct. 28 and a filing of an amended complaint by Nov. 4.

When the lawsuit against the Texas law was filed on Aug. 28 in federal court in Austin, business council President David Levine said the law stifles free speech and punishes businesses for prioritizing responsible investments. The flagship investment funds of two of the council's members, Etho Capital and Our Sphere, were blacklisted by the Texas comptroller, according to the lawsuit. 

The Texas response at times referenced a ruling in a case challenging Arkansas' 2017 law requiring government contractors to certify they don't participate in boycotts of Israel.

The U.S. Supreme Court last year let stand an Eighth Circuit U.S. Court of Appeals decision finding the First Amendment protects speech and association in support of a boycott, but not economic decisions against the target of a boycott.

Texas was an early enactor of anti-environmental, social, and governance laws with two measures prohibiting state and local government contracts worth $100,000 or more with entities that "boycott" or "discriminate" against the fossil fuel or firearm industries. So far, 19 financial firms, including municipal bond underwriters, have been blacklisted by the state for purposes of contracts and divestment.

Last October, Paxton put several firms, including Bank of America, JP Morgan, Morgan Stanley, RBC Capital Markets, and Wells Fargo under review over their involvement with the Net Zero Alliance, which seeks a transition to net-zero greenhouse gas emissions by 2050.

Texas taxes on oil and natural gas production, which hit a record $10.8 billion in fiscal 2022, generated $9.28 billion in fiscal 2023 and $8.43 billion in fiscal 2024 as natural gas-related collections fell sharply, according to revenue data from the comptroller's office.