A US court ruling against a Texan law requiring proxy advisors to explain when they are using non-financial inputs in ESG-related recommendations is only a “partial victory”, according to shareholder advocacy group As You Sow.
Last Friday, a federal judge granted a temporary injunction on free speech grounds in favour of proxy advisors Glass Lewis and Institutional Shareholder Services (ISS). The ruling delays a bill, SB2337, introduced by the state’s Republican-led legislature to increase administrative barriers to integrating ESG factors into investment decisions.
As well as requiring disclosures when voting advice is based on “non-pecuniary” factors, SB2337 compels firms to provide justification whenever recommendations differ from company management.
As reported by Bloomberg, US District Judge Alan Albright of the Western District of Texas said the statute would compel speech by forcing the advisory firms to issue disclosures “they don’t think are accurate”. A trial has been set for 2 February.
But the ruling only applies to ISS and Glass Lewis, leaving the broader law intact. This leaves other actors involved in exercising shareholder voting rights vulnerable to enforcement under the law’s provisions, according to As You Sow.
“This decision affirms that Texas cannot silence financial firms simply because they provide investors with information on climate and governance risk,” said Danielle Fugere, President of As You Sow. “It’s a critical step toward restoring common sense and constitutional protections to shareholder voting.”
In addition to violating the First Amendment, As You Sow contended the law conflicted with federal securities law, which encourages fiduciaries to consider all material risks – including environmental ones.
SB2337 is one of a number of similar bills being introduced at state level which introduce barriers to the sharing and analysis of ESG information for investment purposes.
“Had this law been enforced against ISS and Glass Lewis, it would have limited how shareholders vote their proxies and mitigate climate and social risks,” said Fugere. “That’s why this ruling is so essential – and why we must keep fighting for full protection.”
