Federal Court Blocks Texas Anti-ESG Law, Setting Limits on State Leverage Over Corporate Policy

Key Takeaways

• Texas’s Anti-ESG Framework Hits a Wall: A federal court permanently blocked Senate Bill 13, ending Texas’s attempt to use public investment and contracting rules to counter perceived ESG-driven energy boycotts.
• Speech-Based Enforcement Didn’t Hold Up: The court found the law crossed constitutional lines by tying financial and contracting consequences to speech, advocacy, and subjective assessments of intent.
• Immediate Compliance Relief: State pension divestment mandates and contract certification requirements tied to energy boycotts are no longer enforceable.
• A Warning for Policymakers: ESG-related restrictions built on vague standards or ideological classifications are unlikely to survive judicial scrutiny.

Deep Dive

A federal judge has permanently blocked Texas from enforcing Senate Bill 13, striking down one of the state’s most aggressive attempts to push back against Environmental, Social, and Governance practices through public investment and procurement rules.

In a recent ruling, the United States District Court for the Western District of Texas found that SB 13 violates both the First Amendment and the Due Process Clause of the Fourteenth Amendment. The court barred Texas officials from enforcing the law in full, concluding that it relied on vague standards and impermissibly tied economic consequences to protected speech and association.

State efforts to regulate ESG-related conduct through contracting and investment rules face hard constitutional limits, particularly when enforcement depends on subjective judgments about intent, advocacy, or affiliations.

How Texas Tried to Rein in ESG Through Investment and Contracts

Passed in 2021 and authored by Brian Birdwell, SB 13 was designed to counter what Texas lawmakers described as financial discrimination against the fossil fuel sector. The law embedded two enforcement mechanisms into state law.

First, the Texas Comptroller was required to maintain a public list of financial companies deemed to be “boycotting energy companies.” State retirement systems and the Permanent School Fund were required to divest from listed firms and prohibited from making new investments in them, subject to limited fiduciary exceptions.

Second, the law extended into public procurement. Companies with ten or more employees seeking state or local government contracts valued at one hundred thousand dollars or more had to certify that they did not boycott energy companies and would not do so for the duration of the contract. Without that certification, contracts could not proceed.

Both mechanisms relied on a broad definition of “boycott,” including actions intended to penalize or limit commercial relations with fossil fuel companies unless justified by an “ordinary business purpose.”

Why the Court Rejected the Law

Texas argued that SB 13 regulated commercial conduct, not speech. The court disagreed, focusing on how the law was written and enforced.

The judge found that SB 13’s emphasis on intent, particularly language covering actions “intended to penalize,” easily swept in protected expression. Public statements, advocacy, and affiliations with climate-focused organizations could be used as evidence that a company was boycotting energy firms. The statute expressly allowed regulators to rely on publicly available information, meaning speech itself could trigger blacklisting and economic penalties.

Because the law operated as a viewpoint-based restriction, the court held that it violated the First Amendment.

The court also found SB 13 unconstitutionally vague. Key terms such as “penalize,” “limit commercial relations,” and “ordinary business purpose” were undefined, leaving companies without clear guidance on what conduct was prohibited or how to challenge adverse determinations. Evidence showed inconsistent enforcement and broad discretion vested in the Comptroller, raising due process concerns.

What This Changes for Organizations

The ruling permanently blocks enforcement of both the investment and procurement provisions of SB 13. State funds can no longer be forced to divest based on a company’s perceived stance toward fossil fuels, and public entities may not condition contracts on certifications related to energy boycotts under the statute.

For firms doing business with Texas or managing public funds, the decision removes a compliance requirement that linked access to capital and contracts to expressive or associative conduct.

The court’s decision does not prohibit states from addressing concerns about ESG-driven financial practices. It does, however, draw a firm line around how those concerns may be addressed.

Laws that rely on vague standards, subjective intent tests, or classifications tied to speech and association are unlikely to survive judicial scrutiny. Measures grounded in clearly defined, objective financial criteria are far more defensible.

The ruling underscores the importance of monitoring not just ESG policy debates, but the legal structures behind them. As states continue to test different approaches, the constitutional boundaries outlined in this case will shape how far regulators can go in using economic leverage to influence corporate behavior.

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