Texas anti-ESG law prompts legal filing

An Austin, Texas-based organization called the American Sustainable Business Council (ASBC), acting on behalf of some of its members, has sued Texas for “violating the free speech and association rights protected under the First and Fourteenth Amendments of the United States Constitution through the implementation of SB-13. a law that penalizes private companies that choose not to make risky investments in fossil fuel companies.”

According to ASBC, SB-13 prohibits state investments and contracts with companies that advocate for reductions in reliance on fossil fuels. The lawsuit, filed in the Western District of Texas’ Austin Division, argues that SB-13 discriminates against companies that use environmental, social and governance (ESG) metrics in their investing and business practices.

While most recycling, landfill diversion and waste-to-resources activity is market-driven, companies with ESG targets have tied activities such as using recycled-content materials or diverting byproducts from landfills to their ESG programs.

Several equity funds active in recycling and waste conversion markets also tie their investment decisions into ESG programs and similar corporate governance programs that could include recycling and waste diversion methods as ways to lower carbon emissions.

ASBC says the Texas law has both a negative impact on businesses that use ESG metrics and on everyday Texans. The organization says its lawsuit “highlights the substantial financial harms SB-13 has had on Texas taxpayers, workers, business owners and pensioners.”

“SB-13 is not just a misguided policy, it is an unconstitutional attack that stifles free speech and punishes businesses for prioritizing responsible investments,” says David Levine, president and co-founder at the ASBC. “By challenging SB-13, we aim to protect the rights of all businesses to operate freely and responsibly.”

Among the companies ASBC represents are San Francisco-based Etho Capital LLC, which offers an exchange-traded fund (ETF) based on ESG and climate impact analysis, and California-based Sphere Inc., which oversees the Sphere 500 Climate Fund.

“Laws like SB-13 not only inhibit economic growth and innovation but also set a dangerous precedent for the role of government in business affairs,” Etho Capital CEO Amberjae Freeman says. “Etho Capital believes that responsible investing is not just good for the environment but also for long-term economic growth. SB-13’s shortsightedness is costing Texans millions and hindering progress towards a more resilient and inclusive economy. It’s time to put an end to this detrimental law.”

Alexandra Wright-Gladstein, founder and CEO of Sphere, says, “The Texas law is intended to limit our ability to offer investment options, but really harms Texas in the process.” 

“Gov. Abbott should have never signed SB-13; the law is bad for Texas businesses and taxpayers and violates the U.S. constitution,” says Skye Perryman, president and CEO at Democracy Forward, a national legal organization helping represent ASBC.

The association is requesting a federal court to declare SB-13 unconstitutional and unenforceable.