Texas Comptroller Determined to Enforce Law Making Oil Divestment Illegal


Activists have been pressing investment managers to divest from oil companies as they seek to make things more difficult for the fossil fuel industry. In response, Texas has passed a law that makes it illegal for investment managers doing business in the state to divest from oil companies. Now, the state’s comptroller is beginning efforts to enforce the law. Texas is at the forefront of the effort to push back against activist investors’ efforts to punish the oil industry, as several other states have since passed similar legislation.

Environmental, Social, and Governance (“ESG”) investing has gained in popularity as many American investors have made climate a determining factor in where they invest their money. Many investment funds have attempted to dictate corporate actions based on their own policy preferences, targeting companies that have policies or produce goods they do not like.

The Law Allows Texas to Punish Companies that Boycott the Energy Industry

In September 2021, Texas passed Senate Bill 13 during an active legislative session. The Texas law prohibits public investment in companies that boycott energy companies. In other words, it is a boycott of companies that normally are the ones doing the boycotting. The law defines “boycotting energy companies” as:

“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”

The boycott must not have a legitimate economic purpose and must be initiated on the basis that the company engages in the exploration, production, or sale of fossil fuel-based energy and does not pledge to meet standards beyond those required by federal or state law.

Texas Can Withhold State Contracts and Divest Itself

Texas has another powerful weapon that it can legally use. The state’s Teacher Retirement System has over $200 billion in assets. In addition, the pension fund for state employees has tens of billions of dollars in additional assets. These public funds make large investments on behalf of employees.

Texas has additional sticks it can wield besides its own divestment in these companies. The state awards billions of dollars in contracts each year. Under the law, Texas can refuse to award contracts to businesses that boycott oil companies. The penalties can be steep for investment companies that are hoping for a piece of the financial pie available to those managing Texas pensions.

Recently, Texas State Comptroller Glenn Hegar took the first steps to enforce the law. He sent a letter to 19 investment firms to determine whether they are complying with it. The list of companies that received the letter includes investment powerhouses such as JPMorgan Chase & Co. and Wells Fargo & Company.

Hegar has said he intends to send letters to up to 100 other firms to enforce the new law. According to Hegar, these investment funds attempt to have it both ways, assuring Texas that they are committed to the fossil fuel industry while using ESG standards that may target oil companies to placate ESG-minded activist investors. The letters state that failure to respond and provide information within 60 days will be treated as a presumption that the investment firms are not following the law.

At the outset, Hegar is just beginning his efforts, seeking more information from the firms as a first step. His letter asked the firms to provide his office with their ESG policies and a list of their mutual or exchange-traded funds that limit or do not allow investment in fossil fuel companies. This could make things difficult for major investment firms with funds that invest based on certain social criteria.

There Are Some Signs the Law Is Working

There are some signs the law is already working to achieve its intended purpose. One of the most activist investment firms, BlackRock Financial, has begun to back off from some of its more extreme anti-oil stances. BlackRock has responded to Texas’ inquiries with assurances that it is committed to the energy sector.

Not only could Texas punish investment managers who fail to follow the law, but the state’s funds could divest themselves of their holdings in companies that fail to follow the law. For example, if a company like Google refuses to sell some technology services to oilfield companies, the pension funds could be forced to sell shares in Google.

There are some exceptions to the law that could allow pension funds to continue to hold these stocks, including:

  • The pension fund could continue to hold the stock if it can show that being forced to sell the stock would be bad for its members
  • If the pension fund holds the investment indirectly, through an investment in another fund, it would not be forced to sell

Texas Is Intent on Pushing Back

The Texas bill is the latest step in an effort to push back against corporate activism that has targeted certain industries and companies. Big Tech and other large companies have tried to enforce their ESG agendas in ways that also target states whose public employees, through their pension plans, invest in their stocks and give them asset management contracts.

On one hand, politicians have been pleading with oil companies to increase production to tamp down rising energy prices that are beyond their control. On the other hand, they are advancing ESG policies that could harm these companies’ business prospects. They frequently encourage activist investors to pressure the same companies they critically need right now.

Today, Texas is taking steps to enforce a relatively new law that benefits a large industry that employs many Texans and contributes billions of dollars to the state’s economy. This is likely just the first step in those efforts.