Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 8 MIN READ

State-level ESG pushback has a statute now

Texas SB 13 and SB 19 have been live for three months, West Virginia has put fifteen state treasuries behind a letter, and Oklahoma is drafting its own version

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 7 sections
  1. What Texas actually did
  2. The BlackRock detonator
  3. West Virginia's letter and the coalition
  4. Oklahoma's pending bill and the drafting trend
  5. What the statutes do not say, and where the pressure points are
  6. What this means for a company forming now
  7. Sources

he anti-ESG movement stopped being a press release in 2021. Texas signed two bills in June, both took effect September 1, and the Comptroller is now on a statutory clock to publish a list of banks the state must divest from. That is the shape of the thing.

For a founder or treasurer trying to understand what changed, the short version: several red states have decided that environmental, social, and governance screens applied to fossil fuels and firearms are a form of commercial discrimination, and they are writing contracting and investment statutes to penalize the asset managers who run those screens.

What Texas actually did

Two bills, signed within two weeks of each other, now sit in the Government Code.

Texas SB 13 became Chapter 809 of the Government Code. It does two things. First, it directs the Comptroller to publish and maintain a list of "financial companies that boycott energy companies," with "boycott" defined in Section 809.001 as, without ordinary business purpose, refusing to deal with, terminating business activities with, or otherwise taking action intended to penalize a company that explores for, produces, transports, or sells fossil-fuel-based energy and "does not commit or pledge to meet environmental standards beyond applicable federal and state law." Second, once a company is on the list, state retirement systems (ERS, TRS, the Permanent School Fund, and others) must divest their holdings in that company on a statutory schedule, and state and local governmental entities are prohibited from awarding contracts of $100,000 or more to that company unless the contract includes a written verification that the company does not boycott energy.

Texas SB 19, signed eleven days later, is the same statutory mechanism pointed at a different industry. It added Chapter 2274 to the Government Code (the Firearm Industry Nondiscrimination statute) and prohibits governmental entities from contracting with any company with ten or more full-time employees for goods or services of $100,000 or more unless the company verifies in writing that it does not "have a practice, policy, guidance, or directive that discriminates against a firearm entity or firearm trade association." Both statutes took effect September 1, 2021.

The important operative phrase in SB 13 is "commit or pledge to meet environmental standards beyond applicable federal and state law." Read literally, an asset manager does not need to stop financing oil and gas to land on the list. It only needs to have publicly committed to a standard stricter than what federal and state law already require, and to have done so in a way Texas can characterize as reducing commercial dealings with an energy company. The definition is broad enough to capture public signatories to Climate Action 100+, the Net Zero Asset Managers initiative, and the Glasgow Financial Alliance for Net Zero (GFANZ), all of which proliferated through 2020 and 2021.

The BlackRock detonator

The policy ambition that made these bills possible was not drafted in Austin. It was written by Larry Fink in January 2020, in the annual letter to CEOs that declared "climate change has become a defining factor in companies' long-term prospects" and committed BlackRock to exiting investments in thermal coal producers, building sustainability into portfolio construction, and launching products that screened fossil fuels (BlackRock's 2020 letter to CEOs). In January 2021, Fink's follow-up letter asked portfolio companies to disclose how they were moving to net zero by 2050.

For a state whose general revenue fund is meaningfully exposed to oil and gas severance taxes, the announcement that the world's largest asset manager was going to ask companies to report on a capital reallocation away from fossil fuels read as a direct threat to the business model of the state. It also read as a coordination device: if the big three (BlackRock, State Street, Vanguard) all voted proxies the same way, the diffuse-shareholder fiction that ordinarily kept fossil fuel producers governed by their managements would collapse. Texas, West Virginia, and Oklahoma are all responding to the coordination device, not to any one fund's holdings.

West Virginia's letter and the coalition

On November 22, 2021, West Virginia Treasurer Riley Moore announced what he called a 15-state coalition and released an open letter to the U.S. banking industry (West Virginia Press Association release). The coalition represented, by Moore's accounting, more than $600 billion in public assets under management. The letter stated that signatory treasurers would take "collective action" against banks that decline to provide financing to coal, oil, and natural gas companies on ESG grounds, including by ending state banking contracts and reconsidering custody and investment mandates.

Moore's framing, in the press release accompanying the letter, was that the states object to "woke capitalism." The practical move was financial: tie the access that banks have to state deposit and custody business to a certification that the bank is not boycotting fossil fuels. This is the same architecture Texas adopted by statute, but implemented by contracting decisions rather than legislation. It is materially easier to roll out, because it does not require a bill, and materially harder to judicially attack, because it presents as discretionary procurement rather than a speech-regulating law.

The 15-state coalition matters more than the letter. It is a signal to bank treasury teams that the contracting criteria in Texas are going to show up in Kentucky, Louisiana, Arkansas, and elsewhere, either via statute or via state contracting manuals, over the next two cycles.

Oklahoma's pending bill and the drafting trend

Oklahoma HB 2034, filed in the 2021 session as an Energy Discrimination Elimination Act, tracks the Texas SB 13 structure closely. It would require the state treasurer to maintain a list of financial companies that boycott energy companies, and require state governmental entities holding assets with a listed company to divest at least 50% within 180 days and 100% within 360 days of notice, subject to a fiduciary-loss escape (Oklahoma Legislature, HB 2034 bill information). The bill has not yet cleared the Oklahoma legislature as of this writing; it carries over into the 2022 session.

Two things are worth marking about the Oklahoma draft. The first is that it borrows the Texas definition of "boycott" nearly verbatim, including the "commit or pledge to meet environmental standards beyond applicable federal and state law" trigger. The second is the 180/360-day divestment window, which mirrors the structure Texas uses for public pensions but applies it more broadly to state governmental entities. If Oklahoma passes it substantially as filed, a listed financial company loses state business in Oklahoma on the same timeline it loses ERS and TRS mandates in Texas, and the pressure on the financial company to certify itself out of the list becomes cumulative rather than jurisdiction-specific.

Louisiana, Kentucky, Wyoming, and several other states are reported to be drafting similar bills for their 2022 sessions. The model is now public, tested through one legislative cycle, and has survived First Amendment pre-enforcement criticism long enough to become law.

What the statutes do not say, and where the pressure points are

Read carefully, SB 13 and HB 2034 do not ban investment in any particular asset manager. They ban investment in financial companies that "boycott" energy companies. The escape hatch is certification: an asset manager can stay off the list by declining to sign ESG pledges, by structuring its ESG products as opt-in vehicles that do not bind the firm's general investment policy, or by providing written verification to the Comptroller that it has "ordinary business purpose" for any reduction in fossil-fuel exposure. That wording is load-bearing. It gives Texas a reason to call the statute narrow, and it gives the asset manager a reason to pay careful attention to how its general counsel describes its firmwide commitments.

The certification design is also where litigation will land. A financial company that signs the GFANZ or Net Zero Asset Managers pledges is making a firmwide statement about portfolio construction that will be difficult to reconcile with an "ordinary business purpose" defense in front of the Texas Comptroller. Whether the Comptroller's listing decision is reviewable, and on what standard, is not yet settled. SB 13 does not include an express judicial-review provision for listed companies, though general administrative-law review is likely available.

The constitutional exposure sits on two axes. First, a First Amendment challenge analogous to the BDS anti-boycott cases, several of which went to the circuits in 2019 and 2020 with mixed results on whether state contracting conditions tied to commercial boycotts qualify as "speech." Second, a preemption challenge under ERISA for any state plan that is itself subject to ERISA, and a state-fiduciary-law challenge from beneficiaries who argue that a politically driven divestment produces lower risk-adjusted returns. Neither axis has yet produced a filed case against SB 13 as of early December 2021, but the bar is paying attention; the fiduciary-duty argument is where plaintiff firms are likely to look first, because it survives without a First Amendment theory.

What this means for a company forming now

For most readers of this site, the state-level ESG war is distant. If your LLC is a two-person consulting practice or a rental-property holding vehicle, none of this touches you directly. The relevance shows up if you are a startup in energy, firearms, or financial services that expects to sell into state government contracts, or if you are a holding company whose investors are large institutional managers with public ESG policies.

For the first group, the operational answer is that state contracts of $100,000 or more in Texas and several other states now require a certification about your own firmwide policies toward energy and firearm customers. That certification lives in the contract file. It should be drafted with your counsel and should match your actual board and investment-committee minutes.

For the second group, the question is whether your institutional investors are going to be pressured, during 2022, to either withdraw from GFANZ-style commitments or accept placement on Texas's Chapter 809 list. That is a conversation to have with your lead investor and your board observer. It may affect future financing terms and, for a company considering redomiciling to Texas or Oklahoma, the calculus around the state's deposit and banking relationships.

The broader pattern, for the next two years, is that ESG is going to stop being a cost-free signaling exercise for large asset managers. States are now pricing the signal. That is the thing to track.

Sources

Keep reading

More from the journal.