• U.S. federal court rules Texas Senate Bill 13 unconstitutional, halting divestment and contracting restrictions tied to ESG and fossil fuel policies.
• Decision clarifies constitutional boundaries for anti-ESG legislation, raising governance and compliance implications for states, asset managers, and public funds.
• Ruling could reshape how governments engage with capital markets as political battles over climate finance intensify globally.

Austin Court Halts Texas Anti-ESG Framework

A federal judge in Austin has struck down Texas’s controversial anti-ESG statute, Senate Bill 13, delivering a major legal setback to one of the most aggressive state-led efforts to push back against climate-focused investing in the United States.

The United States District Court for the Western District of Texas ruled that SB 13 violates the First and Fourteenth Amendments and permanently barred state officials from enforcing it. The law had required public investment funds to divest from financial firms deemed to be “boycotting” fossil fuel companies and forced contractors to certify they would not engage in such activity.

Judge Alan Albright wrote:
“SB 13 is impermissibly vague in violation of the Fourteenth Amendment because it fails to provide persons of ordinary intelligence a reasonable opportunity to know what conduct is prohibited and does not provide explicit standards for determining compliance with the law. Thus, the law is unconstitutional and unenforceable.”

The ruling reshapes the legal landscape for anti-ESG policy as states and investors increasingly clash over the role of climate risk in financial decision-making.

How SB 13 Reshaped State Investment Policy

Passed in 2021, SB 13 formed part of a broader anti-ESG movement among Republican-led states. Texas lawmakers argued that ESG investing threatened the state’s energy sector, which remains central to its economy. Texas supplies nearly a quarter of U.S. domestic energy and holds more than 40 percent of the nation’s crude oil proved reserves and production.

The statute created two powerful enforcement tools. First, it required the Texas Comptroller to maintain a public list of financial firms accused of boycotting energy companies. State pension funds and the Permanent School Fund were expected to divest from companies appearing on that list.

Second, the law imposed procurement restrictions. Any company with at least ten employees seeking a government contract valued at $100,000 or more had to certify that it did not boycott fossil fuel businesses.

The blacklist expanded to include major global banks and asset managers such as BNP Paribas, UBS, Nordea Bank, Schroders and HSBC, alongside hundreds of individual funds. BlackRock was initially listed but removed in June 2025 after adjusting its climate group participation and energy investment policies.

Court Finds Speech Protections Violated

Texas argued that SB 13 regulated commercial conduct rather than expression. The court rejected that claim, finding that the law’s language captured protected speech, advocacy and association related to climate issues.

Central to the ruling was the statute’s definition of a boycott, which included “taking any action that is intended to penalize” energy companies. The judge concluded that such wording allowed the state to penalize financial institutions for expressing views on climate risk or aligning with sustainability initiatives.

Because the law permitted officials to rely on publicly available statements and affiliations when determining compliance, companies could face economic penalties based on viewpoints disfavored by the state. The court held that this amounted to a viewpoint-based restriction incompatible with the First Amendment.

Vagueness and Enforcement Concerns

The decision also focused on due process. Key phrases such as “limit commercial relations” and “ordinary business purpose” lacked clear definitions, leaving firms uncertain about how to comply or challenge blacklisting decisions.

Evidence presented during the case showed inconsistent enforcement, with some companies penalized despite citing legitimate business reasons while others faced no consequences for similar conduct. The court found that this ambiguity encouraged firms to avoid lawful activity to reduce regulatory risk, effectively chilling speech.

The injunction now prevents Texas from enforcing both the divestment provisions affecting state investments and the procurement certification requirements affecting government contracts.

RELATED ARTICLE: Texas Court Blocks Enforcement of Anti-ESG Law

Policy Tensions Remain

Supporters of SB 13 framed the legislation as a defense of free markets rather than an attack on expression. They argued that coordinated climate alliances among banks and asset managers were steering capital away from lawful energy producers and undermining fiduciary obligations.

The court’s ruling does not eliminate those policy concerns. Instead, it sets constitutional boundaries on how states may respond, emphasizing that economic penalties cannot be tied too closely to speech or association.

David Levine, President and Co-Founder of the American Sustainable Business Council, said following the decision:
“This is a massive win for sustainable businesses and investors, for responsible shareholders in Texas, and for freedom. The court has affirmed what we’ve always known: you cannot punish businesses for their investment decisions or silence those who speak about climate risk. SB-13 cost Texans hundreds of millions of dollars, blacklisted responsible businesses, and hindered progress towards a more resilient economy.”

What Executives and Investors Should Watch

For asset managers, banks and pension trustees, the ruling introduces fresh legal clarity at a time when ESG regulation remains politically volatile. The decision may embolden legal challenges to similar anti-ESG measures in other jurisdictions while forcing policymakers to rethink how public capital is deployed without infringing constitutional protections.

Globally, the case illustrates the growing intersection between governance frameworks, political ideology and climate finance. As governments attempt to shape capital flows toward or away from certain industries, courts are likely to play an increasingly decisive role in defining the limits of state intervention.

The Texas ruling signals that while debates over ESG and fossil fuels will continue, attempts to regulate markets through broad ideological tests face heightened legal scrutiny, with implications that extend far beyond U.S. borders.

Follow ESG News on LinkedIn