Taxpayers scored a win this week when a federal court ruled that Texas can no longer enforce its misguided law barring the state and its municipalities from doing business with financial institutions accused of “boycotting” fossil fuels. Enacted at the height of the anti-ESG movement, Senate Bill 13 was a textbook example of big-government overreach—one that carried real consequences for taxpayers, retirees, and Texas’ hard-earned reputation as a pro-business state. Texans will be better off without government micromanagement of investment decisions.
Whatever one’s views on ESG, SB 13 was poorly conceived from the start. To contract with the state or its local governments, financial institutions were required to certify that they were not engaging in boycotts, a term the law defined in sweeping and ambiguous ways. In practice, even the appearance that a firm considered climate risk or social responsibility as part of its fiduciary duty to maximize returns could be enough to trigger exclusion from Texas’ markets.
This left in an uncertain position financial institutions that were adhering to their fiduciary obligations while also offering a handful of investment options to their wide array of clients.
A federal judge agreed. In striking down SB 13, the court found the law “facially overbroad,” infringing on constitutionally protected speech and activity. The ruling also held that the statute was unconstitutionally vague, with an unclear definition of “boycott” that invited arbitrary and discriminatory enforcement. It was a decisive loss for Attorney General Ken Paxton and former Comptroller Glenn Hegar.
SB 13 was all about scoring political points, but it came at a real cost to Texans. In fact, a study conducted by Daniel Garrett of the Wharton School of the University of Pennsylvania and Ivan Ivanov of the Federal Reserve Bank of Chicago, entitled “How US anti-ESG laws raise borrowing costs for public finance,” found that the Texas laws resulted in at least five financial institutions leaving the municipal bond market, thus raising borrowing costs. The paper found, “This increase in yields translates to an additional US $300 million to US $500 million in borrowing costs on the US $31.8 billion in municipal bond issuance during the first eight months following enactment of the laws.”
That’s because Texas’ aggressive posturing toward asset managers and banks certainly didn’t create a welcoming environment. When Texas restricted competition among underwriters and investors, it reduced the pool of potential buyers for its bonds. Fewer bidders meant higher borrowing costs, and higher borrowing costs meant fewer roads, smaller schools, and delayed utility projects—or, alternatively, higher taxes to pay for larger yields that enticed investors to be buyers.
The government shouldn’t harass the private businesses that are contributing to Texas’ success. As we’ve seen, institutional investors, who prize stability and reputational safety, may decide it’s simply not worth the risk, and ultimately leave taxpayers paying the price. This is something you’d expect in California, not in Texas.
The court’s ruling also provides a legal roadmap for challenges to laws in states with similar statutes. Multiple states—including Arkansas, West Virginia, Kentucky, Louisiana, and Wyoming—have passed laws restricting state business with companies that “boycott” energy sectors or adopt ESG principles. Many of those laws use language very similar to SB 13’s definitions of prohibited boycotts.
Taxpayers will surely be keeping an eye out on the courts to see which domino might be the next to fall.
The bottom line is the government shouldn’t involve itself in the debate over ESG investing—doing so would come at the expense of returns to investors. Let private businesses offer different options and the market will determine which are funded and which aren’t. But state-run retirement plans and pensions should be focused on delivering returns, not squeezed by laws that restrict or require certain types of investments in specific industries. When that happens, as the Texas law shows, taxpayers and retirees end up paying the expensive price.