Federal Court Strikes Down Texas Anti-ESG Law: A Bellwether for the Fate of Similar Laws in Other States?

On February 3, 2026, a federal district court in Texas invalidated Texas Senate Bill 13 (SB 13), which was designed to restrict state investments and contracts with companies perceived to boycott the fossil fuel industry in two ways: first, by requiring divestment and restricting investment and second, by requiring vendors to provide verification that they will not boycott fossil-fuel based energy contract during the contract. In granting the plaintiff’s motion for summary judgment, Judge Alan D. Albright held the Texas law to be both facially overbroad under the First Amendment and unconstitutionally vague under the Fourteenth Amendment. This ruling could inspire challenges to similar legislation in other jurisdictions.

1. A Dual Constitutional Challenge

The Texas legislature has made various attempts to challenge ESG and sustainability-related investing practices. In one such attempt, Texas passed SB 13, which states: 

“If . . . the financial company continues to boycott energy companies, the state governmental entity shall sell, redeem, divest, or withdraw all publicly traded securities of the financial company []” with boycott energy companies meaning to “[b]oycott energy company[ies], without an ordinary business purpose, refusing to deal with, terminating business activities with, or otherwise taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations with a company because the company:

(A) 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

(B) does business with a company described by Paragraph (A).”

The American Sustainable Business Council (ASBC), representing businesses advocating for sustainable practices, successfully challenged SB 13 on two key constitutional grounds.

First Amendment – Overbreadth: The court determined that SB 13 was facially overbroad, as it infringed upon constitutionally protected speech. The law’s definition of “boycott energy companies” included “taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations with” (emphasis added) companies in the fossil fuel industry. The judge noted that the phrase “any action” was not limited to purely commercial conduct and therefore penalized activities protected by the First Amendment.

Accordingly, the court found that this broad language encompassed a wide range of protected expressive activities, including speaking about risks associated with fossil fuels, advocating for sustainable energy choices, and associating with like-minded organizations. This is not the first time that this rationale has been used to strike down an investment boycott requirement. 

Fourteenth Amendment – Vagueness: The court also ruled that SB 13 was unconstitutionally vague. The court determined that the definition of “boycott”—encompassing “refusing to deal with,” “terminating business activities with,” or “otherwise taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations with” fossil fuel companies—lacked objective standards and failed to provide a reasonable opportunity to understand what conduct was prohibited. Furthermore, the court found that the statute’s “ordinary business purpose” exception was applied inconsistently by the Comptroller, who blacklisted companies even when they asserted that their actions were business-driven, without providing clear explanations. This lack of clarity, coupled with the potential for arbitrary enforcement, contributed to the vagueness finding.

Notably, Judge Albright, who was appointed to the District Court in 2018 by President Trump, found the law unconstitutional despite arguments from Texas that the statute was carefully crafted to only target unprotected commercial conduct. 

2. Potential Impacts on Anti-ESG Laws of Other States

The Texas ruling comes amidst a growing nationwide trend of states enacting anti-ESG laws that: (i) restrict consideration of ESG-related factors in investment decisions; (ii) ban certain contracts with firms that boycott fossil fuel or firearm industries; or (iii) prohibit the use of ESG criteria to determine whether to provide services to certain customers. Over the past several years, numerous states—including Alabama, Arkansas, Florida, Idaho, Kentucky, Tennessee, Utah, and West Virginia—have passed or proposed anti-boycott laws in the manner described above. 

The Texas case is a direct challenge to the legality of such state-level interventions. As a district court decision, this decision does not bind other district courts, but we should assume it will have some persuasive authority for courts considering challenges to similar laws. The Texas ruling may even function as a bellwether for other states that have enacted similar anti-ESG legislation. It does not, however, impact any federal rules on how ESG or other non-pecuniary factors may be considered, including with respect to retirement investments governed by ERISA. 

3. Outlook and Key Takeaways

If affirmed, the decision suggests that US courts may be willing to set limits on aggressive state efforts to prohibit ESG-related business conduct. However, Texas is likely to appeal this decision to the Fifth Circuit Court of Appeals, meaning that the future of SB 13 remains subject to further judicial review. While for the time being, Texas cannot blacklist companies under this law that are deemed to be boycotting the fossil fuel industry, the law could be re-instated on appeal or amended to more narrowly target boycotts of the fossil fuel industry. 

For clients navigating the increasingly fragmented ESG landscape, both in the US and outside the US, constitutional challenges to anti-ESG laws add one more layer of complexity. Companies doing business and seeking to do business with the state of Texas should continue to monitor these legal developments closely. They should also carefully consider any public statements and actions (e.g., public filings) that could potentially be construed as boycotts of the fossil fuel industry.