August 31, 2025

Federal Judge Halts Texas Law on Proxy Advisory Firms

News Summary

A federal judge in Austin has temporarily blocked the implementation of Texas Senate Bill 2337, which mandated proxy advisory firms to disclose ESG-related recommendations. The law aimed to influence how companies approach environmental and social factors, but Judge Alan Albright raised concerns over its implications for free speech and accuracy. As a result, proxy firms can continue their operations without additional compliance pressures for now, awaiting a trial set for early February. The outcome could significantly impact ESG investing in Texas.

A federal judge has issued a temporary injunction to block a Texas law that would have required proxy advisory firms to disclose the limitations of their environmental, social, and governance (ESG) recommendations. The law, Senate Bill 2337 (SB 2337), was scheduled to take effect on September 1, but U.S. District Judge Alan Albright raised concerns over free speech implications and the law’s unclear purpose during a hearing.

Judge Albright’s ruling followed legal challenges from prominent proxy advisory firms Glass Lewis & Co. and Institutional Shareholder Services Inc. (ISS), who argued that the statute could force them to produce disclosures they believe are misleading. The judge indicated confusion about what the law aims to achieve and remarked that it may not serve the interests of shareholders.

SB 2337 demanded that proxy firms inform clients that their ESG-related recommendations are influenced by “nonfinancial factors.” Furthermore, it mandated that this information be clearly displayed on their websites and communicated to shareholders of Texas-based companies. The implications of this law extend to various firms headquartered in Texas, such as American Airlines, Exxon Mobil, and Tesla, affecting proxy advice related to hundreds of businesses.

The injunction will remain in place pending a trial scheduled for February 2, during which more detail will emerge regarding the law’s implications on proxy advisory practices. Judge Albright indicated he would provide a written order concerning the injunction within the next 30 days.

Responses to the ruling varied. Legal representatives for Glass Lewis expressed gratitude for the court’s decision. In contrast, the Texas Association of Business, which sought to defend the law, declined to comment on the outcome. This controversy has attracted attention due to claims that the law aims to impose a conservative viewpoint regarding ESG and diversity, equity, and inclusion (DEI) matters.

Proxy advisors, including Glass Lewis and ISS, have taken a united stance against the law, filing separate legal challenges on July 24. They contend that ESG advice is inherently subjective and cannot be reliably categorized as purely factual. ISS has reported that considerable sums have already been spent in preparation for compliance with the law, highlighting the potential financial burden placed on these firms by legal changes.

The Texas Attorney General’s office, which represents the state in this case, acknowledged challenges in finding witnesses to support the defense of the law during the hearing. Additionally, Judge Albright granted a motion for the Texas Stock Exchange and the Texas Association of Business to participate in the case as defendants.

The legal dispute also reflects broader national discussions on the legitimacy of ESG investing and its impact on shareholders’ financial interests. The ongoing tension touches upon how corporations balance profitability with social responsibility, a conversation that continues to evolve significantly in various sectors.

The case, comprising Glass Lewis v. Paxton and ISS v. Paxton, highlights the complex intersection of regulation, investment strategy, and political ideology in the evolving landscape of corporate governance. As ESG considerations grow in importance, the outcome of this legal challenge could set significant precedents affecting proxy advisory practices and shareholder engagement.

As of now, the injunction offers temporary protection to proxy advisory firms in Texas from complying with SB 2337, at least until a more definitive legal ruling is reached in February.

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Author: STAFF HERE GEORGETOWN

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