Dive Brief:
- Proxy adviser Institutional Shareholder Services is facing new litigation from four states, led by Texas Attorney General Ken Paxton, alleging the company violated state deceptive trade practices laws over its integration of ESG considerations.
- Texas filed its suit on Wednesday, in conjunction with similar state court lawsuits from Nebraska, Iowa and West Virginia. An ISS spokeswoman told ESG Dive Tuesday that the world’s largest proxy adviser believes “the allegations lack merit and will vigorously defend against them.”
- The four lawsuits filed May 20 bring to five the number of state lawsuits against ISS alleging the proxy adviser is using ESG factors to influence corporate boards in violation of consumer protection laws. Florida AG James Uthmeier sued the proxy adviser over similar claims in November.
Dive Insight:
The states all raised issues with ISS’ influence, as well as its integration of environmental and social considerations into the adviser’s benchmark metrics, which the lawsuits allege are in opposition to the proxy adviser’s claim it offers “objective and impartial” advice. The state AGs allege that the company has used its size to influence company boards and further its own ESG goals and issued ESG metrics without studying the financial impact.
Paxton, a Republican Senate primary candidate, had previously announced a probe into ISS and Glass Lewis — which together account for an estimated 97% of the proxy advisory market — in September over the firms’ use of ESG and DEI policies. The probe came shortly after the two firms scored a court victory in the form of a preliminary injunction against a Texas law targeting proxy advisers.
“ISS has enormous influence over how billions of dollars are invested and managed across this country, and they have abused that influence in order to push woke ideology,” Paxton said in a release. “I am suing ISS to restore integrity to America's proxy voting system and put an end to the financial damage caused by putting liberal ideology above sound investment principles.”
The state suits allege varying counts of violations of consumer protection laws, with a range of requested damages, including Texas requesting over $1 million in total damages, according to its complaint. The lawsuits all seek to enjoin ISS from the alleged deceptive practices, which includes allegations of failing to disclose how ESG considerations may impact proxy advice.
The ISS spokeswoman told ESG Dive in an emailed statement that the firm’s research and vote recommendations for clients are “based on the proxy voting policies the clients have selected or customized based on their determination of the best interests of the beneficiaries they serve.”
To counter what it calls “misinformation about ISS and the role of proxy advisors,” ISS has launched its own project called “Protect the Voice of Shareholders.” One of the project’s webpages claims “ISS is indifferent to the outcome of a proxy vote,” and “can, and often does, make opposing recommendations to different clients on the same ballot issue depending on the policy the client has chosen.”
The state AGs also announced the creation of a “Multistate Proxy Advisor Coalition” last week, which Iowa AG Brenna Bird’s office said in a press release will look to “act as a unified front against what they call widespread harm from ISS’ practices.”
The coalition spans beyond the five states that have sued ISS so far — Florida, Texas, Iowa, Nebraska and West Virginia — and also includes Alabama, Alaska, Indiana, Kansas, Kentucky, Missouri, Montana, South Carolina, South Dakota, Tennessee and Utah. The states will coordinate their efforts against the proxy adviser, according to Bird’s office.
President Trump also issued an executive order in December targeting “foreign-owned and politically-motivated” proxy advisers and naming ISS and Glass Lewis. The order directed the Securities and Exchange Commission, Department of Labor and Federal Trade Commissions to make a variety of changes to the shareholder process, review state-level litigation and determine whether the firms have violated antitrust laws.
