Glass Lewis and Institutional Shareholder Services (ISS), two of the most prominent U.S. proxy advisory firms, have filed lawsuits against the state of Texas, seeking to block a new law that restricts their ability to advise shareholders on ESG and diversity-related matters.
The lawsuits, lodged on Thursday in the U.S. District Court for the Western District of Texas, argue that the legislation violates the firms’ First Amendment rights by compelling them to convey messages they do not endorse. Texas Attorney General Ken Paxton, the lone defendant in both cases, has not responded to requests for comment.
Signed into law by Republican Governor Greg Abbott in June, the legislation — set to take effect on 1 September — mandates that proxy advisers explicitly notify clients that their recommendations on ESG and diversity, equity and inclusion (DEI) issues are “not being provided solely in the financial interest of the company’s shareholders.” It also requires advisers to submit financial justifications for such guidance.
Glass Lewis and ISS contend that the law would not only interfere with their professional judgment but also force them to echo the state’s political viewpoints. They warn that this could lead to client losses and damage their reputations, particularly if they are required to disclaim their advice as potentially contrary to shareholder interests.
ISS further argued that the law appears aimed at shielding corporate management from shareholder oversight, undermining the role of proxy voting as a key mechanism of accountability. “Texas’s experiment in anti-capitalism thus serves no one,” the firm said in its filing.
Glass Lewis claims to serve over 1,300 institutional investor clients, while ISS said it provided advice to approximately 2,000 clients covering 51,500 shareholder meetings in 2024.
The lawsuits come amid a broader political backlash against ESG and DEI initiatives in the United States, with many companies scaling back such programmes. Former President Donald Trump, the presumptive Republican nominee for 2024, has vowed to eliminate DEI efforts if re-elected.
The cases are Glass Lewis & Co v Paxton, No. 25-01153, and Institutional Shareholder Services Inc v Paxton, No. 25-01160.
