Love Oil or Leave: Texas targets ESG investing
“If you boycott Texas energy, Texas will boycott you,” says Texas State Representative Phil King, co-sponsor of a new law that prohibits state agencies from contracting with or investing in financial companies that boycott the oil and gas industry. In August 2022, Comptroller Hegar released an initial list of 10 financial companies and 350 individual investment funds that boycott energy companies and are subject to divestment by the state. Will this new law face legal challenges from financial companies committed to “net zero” environmental policies?
In 2021, Texas enacted a law (SB 13, sometimes referred to as the Oil & Gas Investment Protection Act) to (i) prohibit state agencies from contracting with or investing in financial companies that boycott energy companies and (ii) require state-run investment funds to divest from any financial company that boycotts energy companies.
Similar bills to punish fossil fuel divestment and carbon-neutral goals have been adopted in Maine and introduced in other states, including West Virginia, Louisiana, and Oklahoma.
Under the Texas law, financial companies with 10 or more full-time employees are prohibited from boycotting energy companies during the term of a government contract valued at $100,000 or more. The company is required to certify in writing that it (1) does not boycott energy companies and (2) will not boycott energy companies during the term of the government contract.[1]
The Texas Comptroller of Public Accounts is required to maintain and periodically update a public list of financial companies that boycott energy companies. To compile the list, the Comptroller may rely on publicly available information and/or request written verification from the company that it doesn’t boycott energy companies.[2]
A company that fails to provide a written verification to the Comptroller within 60 days after receiving a letter is presumed to be boycotting energy companies.[3]
In August 2022, Comptroller Glenn Hegar announced his initial list of 10 financial companies that boycott energy companies, following “an exhaustive period of research and process development.” The 10 companies are:
- BLACKROCK, INC
- BNP PARIBAS SA
- CREDIT SUISSE GROUP AG
- DANSKE BANK A/S
- JUPITER FUND MANAGEMENT PLC
- NORDEA BANK ABP
- SCHRODERS PLC
- SVENSKA HANDELSBANKEN AB
- SWEDBANK AB
- UBS GROUP AG
Comptroller Hegar also released a list of 350 individual investment firms that are subject to the same divestment provisions as the financial companies.
According to the Comptroller’s press release, agency staff leveraged existing research, public statements, and publicly available data to create the list. Comptroller Hegar also conducted verification requests by sending letters seeking additional information to companies and fund managers in finalizing the candidates suitable for listing.
State-run investment funds, including the Employees Retirement System and the Teachers Retirement System, are required to divest from any financial company on the Comptroller’s list that refuses to cease boycotting energy companies.[4]
There are some notable exceptions to this requirement. The state is not required to divest from any indirect holdings in actively or passively managed investment funds or private equity funds.[5] And a state governmental entity can cease divesting if doing so would result in a loss in value or a benchmark deviation as described in Tex. Gov’t Code § 809.056.
Does the Oil and Gas Investment Protection Act violate the First Amendment?
The definition for “boycott energy company” is substantially similar to the definition of “boycott Israel” in Texas’s anti-BDS law, which has faced notable legal challenges.
A boycott is broadly defined under the Oil and Gas Investment Protection Act as “refusing to deal with, terminating business activities with, or otherwise taking any action that is intended to penalize, inflict harm on, or limit commercial relations with a company because the company:
- engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy and does not commit or pledge to meet environmental standards beyond applicable federal and state law; or
- does business with a company described by Paragraph (A).”[6]
The anti-BDS law defines “boycott Israel” as “refusing to deal with, terminating business activities with, or otherwise taking any action that is intended to penalize, inflict harm on, or limit commercial relations specifically with Israel, or with a person or entity doing business in Israel or in an Israeli-controlled territory.”
In January 2022, a federal district court in Texas enjoined the City of Houston from requiring a contractor to certify that it will not and does not boycott Israel, citing the contractor’s First Amendment Rights. The court was primarily concerned with the clause “otherwise taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations” with Israel or Israeli entities. The same language appears in the definition of “boycott energy companies.”
This language is “exceptionally broad,” the court said. “[A]ctions intended to penalize or inflict economic harm on Israel could include conduct protected by the First Amendment, such as giving speeches, nonviolent picketing outside Israeli businesses, posting flyers, encouraging others to refuse to deal with Israel or Israeli entities, or sponsoring a protest which encourages local businesses to terminate business activities with Israel. . . . each of these activities falls under the protective shield of the First Amendment.” The state has appealed the ruling to the Fifth Circuit.
The Oil and Gas Investment Protection Act may face similar First Amendment challenges from financial companies.
[1] Tex. Gov’t Code § 2274.002.
[2] Tex. Gov’t Code § 809.051.
[3] Tex. Gov’t Code § 809.051.
[4] Tex. Gov’t Code § 809.053.
[5] Tex. Gov’t Code § 809.055.
[6] Tex. Gov’t Code § 809.001 (emphasis added).