Texas Attorney General Ken Paxton has initiated a formal investigation into proxy advisory giants Glass Lewis and Institutional Shareholder Services (ISS), alleging that both firms may have misled institutional investors by promoting votes aligned with diversity, equity, inclusion (DEI), and environmental, social, and governance (ESG) initiatives. The move comes amid a growing political backlash against sustainability and DEI programs within the United States.

In his statement, Paxton accused the firms of advancing what he called "radical political agendas" under the guise of financial analysis. He claimed their voting recommendations favor ideological positions over shareholder returns, stating that their guidelines lacked proper economic justification and instead relied on vague corporate terminology. He further criticized the firms for encouraging investors to support resolutions on climate action and gender-based hiring quotas.

First Amendment Battle and Legal Context

The investigation arrives on the heels of a federal court ruling last month that dealt a blow to Texas’ efforts to restrict ESG influence in shareholder voting. The judge issued a preliminary injunction preventing the state from enforcing a newly passed law aimed at limiting how Glass Lewis and ISS provide guidance on ESG-related issues. The court found that the law likely infringed on the firms’ First Amendment rights, particularly their right to provide research and advice to institutional investors.

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Despite this legal setback, the Texas Attorney General’s office has pressed forward, now claiming that both firms are operating in ways that conflict with the financial interests of their clients. The office pointed to specific recommendations that allegedly support corporate decisions inconsistent with fiduciary duty, particularly those aligned with climate and social activism.

Escalating Anti-ESG Sentiment in U.S. Politics

This probe is part of a broader Republican-led effort to curb ESG and DEI influence across corporate America. Paxton’s rhetoric reflects this wider movement, as he accused Glass Lewis and ISS of “smuggling radical, liberal ideology” into American companies and financial markets. He emphasized the scale of their influence, noting their ability to shape corporate governance outcomes involving tens of billions of dollars through voting recommendations issued to institutional investors.

Glass Lewis Responds to Allegations

Glass Lewis swiftly rejected the Attorney General’s claims. In a statement provided to ESG Today, the firm stated that its recommendations are based on decades of research and are intended to promote long-term shareholder value. A spokesperson noted that the firm exclusively serves institutional clients who have the expertise to determine which ESG or financial considerations align with their fiduciary obligations.

The spokesperson further emphasized that their clients are not misled, as they choose which proxy voting policies to follow based on their own investment strategies and risk profiles. The statement also pointed to the recent court ruling that protected the firm’s right to provide independent advice under constitutional free speech protections.

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A Battle Over Influence and Ideology

The conflict between Texas regulators and proxy advisors like Glass Lewis and ISS highlights a growing divide over how corporations should handle sustainability and social responsibility. At the heart of the debate is a fundamental disagreement about the role of ESG factors in financial performance and fiduciary duty.

While critics argue that ESG and DEI policies dilute focus on shareholder returns, supporters contend that these considerations are essential to managing long-term risks and creating resilient, future-ready companies. As this legal and political battle unfolds, proxy advisors, investors, and corporations alike may face heightened scrutiny over the balance between financial value and social responsibility.

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