Texas Attorney General Ken Paxton has launched a formal investigation into Glass Lewis and Institutional Shareholder Services (ISS), the two largest proxy advisory firms in the United States. The probe comes amid escalating scrutiny from Republican lawmakers who are challenging the growing influence of environmental, social, and governance (ESG) factors in corporate decision-making.

Accusations of Misleading Investors

Paxton's office issued civil investigative demands to both firms, alleging that they may have misled institutional investors and public companies regarding ESG-related matters. The investigation seeks to determine whether the firms violated Texas consumer protection laws by failing to disclose material information that could influence investment decisions.

In a public statement, Paxton underscored the significance of the investigation, stating, “Proxy advisors play a massive role in shaping corporate governance decisions in our country, affecting tens of billions of dollars.” Both Glass Lewis and ISS have yet to respond to requests for comment.

The Role of Proxy Advisors in Corporate Governance

Glass Lewis and ISS provide research and voting recommendations to large institutional investors in advance of annual shareholder meetings. These recommendations cover key issues such as board appointments, executive pay, and shareholder resolutions tied to environmental and social policies. Given their influence over how large sums of capital are voted, these firms have become central players in shaping modern corporate governance.

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While their role is often applauded for bringing transparency and efficiency to complex corporate filings, they have also faced criticism for the sway their recommendations hold particularly when those recommendations align with ESG priorities.

Texas Emerges as a Key Front in Anti-ESG Efforts

The investigation is the latest move in a growing backlash from Republican-led states against what they view as politically motivated ESG practices. Critics argue that companies and their advisors should be focused solely on delivering financial returns to shareholders, rather than promoting social or environmental agendas.

Texas has taken a leading role in this counter-effort. Earlier this year, the state passed a law restricting proxy advisory firms from making recommendations related to ESG issues. However, in August, a federal judge issued a preliminary injunction that temporarily blocks enforcement of the law, citing concerns over constitutional overreach.

The Broader ESG Backlash Gains Momentum

The scrutiny of Glass Lewis and ISS aligns with broader national trends. Since President Donald Trump returned to office, his administration has prioritized rolling back ESG-related regulations and dismantling Diversity, Equity, and Inclusion (DEI) programs in both the public and private sectors. Several companies, under political pressure, have already scaled back DEI efforts.

Paxton’s investigation is part of a wider legal and legislative strategy aimed at curbing ESG-driven influence across the financial ecosystem. Proxy advisors, because of their outsized impact on shareholder voting outcomes, are seen as key targets.

Supporters Defend Proxy Firms’ Value to Investors

Despite the political pressure, many in the investment community continue to support the role of proxy advisers. Advocates argue that these firms help investors navigate complex governance landscapes, especially when corporate filings run hundreds of pages long. By distilling key issues into actionable insights, Glass Lewis and ISS enable more informed decision-making and increased board accountability.

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What Comes Next?

As the investigation proceeds, the outcome could set a precedent for how far states can go in regulating proxy advice and ESG engagement. It also signals that the debate over ESG investing is far from over. While proponents push for more responsible corporate behavior aligned with global sustainability goals, opponents frame such efforts as overreach that distracts from core financial priorities.

At the heart of the issue is a fundamental question: should the financial system remain purely profit-driven, or can it also serve broader societal values? The Texas probe into Glass Lewis and ISS may not provide an immediate answer, but it underscores just how politicized that question has become.

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