Dive Brief:
- Glass Lewis & Co. and Institutional Shareholder Services filed a lawsuit against Texas Attorney General Ken Paxton last week over the state’s most recent anti-ESG law. The proxy advisory firms alleged in a July 24 complaint that the law is unconstitutional, and are seeking a preliminary injunction to stop it from going into effect, according to court records.
- The proxy advisors are looking to prevent the implementation of Texas Senate Bill 2337, passed by the state legislature in its most recent session and signed by Paxton June 2. The law would require proxy advisors who advise companies headquartered, incorporated in or re-domesticating to Texas to make that advice solely on financial interests and publish a disclosure if ESG or diversity, equity and inclusion concerns play a role in the advice, according to an analysis by law firm Foley & Lardner LLP.
- Glass Lewis and ISS are seeking a preliminary injunction to prevent the law from taking effect on Sept. 1 and claim the law violates their First Amendment right to free association and the First Amendment’s prohibition on viewpoint discrimination, according to the complaint.
Dive Insight:
ISS and Glass Lewis, the two largest proxy advisors in the U.S., respectively, also said — in addition to alleging the First amendment violations — that SB 2337 violates the Employee Retirement Income Security Act of 1974, the commerce clause and is “unconstitutionally vague.”
Under SB 2337, proxy advisors would be deemed to have considered non-financial factors if their advice is “wholly or partly based on, or otherwise takes into account, one or more nonfinancial factors, including a commitment, initiative, policy, target, or subjective or value-based standard based on” ESG, DEI, sustainability or social credit metrics or membership or commitment to certain groups.
Under the law, the advisory firm would have 24 hours to publish a disclosure statement that “conspicuously states that the service is not being provided solely in the financial interest of the company's shareholders because it is based wholly or partly on one or more nonfinancial factors,” according to the bill text. Advisory firms would also be required to explain their rationale in depth.
ISS said the bill is “unlawful multiple times over” in a press release shared with ESG Dive. The firm said the law is based on a “fundamental misunderstanding” of proxy advisories’ role and incorrectly assumes that a proxy advisory giving “different recommendations to two different institutional investor clients is a problem to be solved for.”
“Serving clients on their own terms is a core value proposition of ISS,” the firm said in the July 24 release. “Further, complying with SB 2337’s mandated warnings will force ISS to falsely state that ISS’ advice to its clients ‘subordinates the financial interests of shareholders.’”
A Glass Lewis spokesperson similarly panned the law in an emailed statement to ESG Dive Friday and said Texas left the firm with “no choice but to take swift legal action to seek to enjoin enforcement of the law before it takes effect.”
“Texas SB 2337 is an unprecedented and blatantly unconstitutional law that targets proxy advisors and their institutional investor clients,” the spokesperson said. “It is unworkable and it exposes both our business and our clients to unwarranted legal and regulatory risk.”
The firms list Paxton as a defendant in his official capacity. Paxton’s office did not respond to a request for comment.
