Proxy Advisers Notch Third Legal Win Staving Off Republican ‘Anti-ESG’ Rules

A federal judge late on June 26 granted a preliminary injunction blocking an Indiana law requiring new disclosures from proxy advisers, marking a third legal victory for Institutional Shareholder Services and Glass Lewis against restrictions backed by Republican lawmakers.

The two firms recommend how investors can vote at corporate annual meetings. Republican politicians have long sympathized with business complaints about their views on areas like executive pay. Lately, they also say the firms unduly favored shareholder resolutions focused on environmental, social or governance (ESG) topics like workforce diversity and climate change.

But a trio of recent cases in which the proxy firms have gained the upper hand—in Indiana and in Kansas this month, and in Texas last year—suggests that these efforts still face slow going.

The Indiana law set to take effect July 1 had required that when the firms recommended votes against company management they would have to provide a “written financial analysis” of their thinking or disclose no such analysis was conducted. Supporters said it was needed to keep advice focused on financial outcomes.

In separate filings, the two firms asserted the law violates their rights including their right to free speech. On Friday, Matthew Brookman, U.S. District Judge for the Southern District of Indiana, among other things agreed with plaintiffs’ arguments the law amounted to prohibited “viewpoint discrimination” because it imposes burdens only if the proxy firms disagree with management.

Representatives for Indiana Attorney General Todd Rokita, defending the law, did not respond to requests for comment.

In a statement, ISS praised Brookman’s decision overturning a law it called “an unconstitutional exercise of power over the free market.” The firm also cited similar federal rulings that blocked attempts to rein in proxy advisers in Kansas and Texas.

“Over the past year, courts in Texas, Kansas, and Indiana have granted preliminary injunctions barring the states’ enforcement of similar laws pushed by outside advocacy groups. This most recent decision is further evidence that states cannot seek to impose onerous obligations on proxy advisors simply for making recommendations that do not align with company management,” ISS said.

A Glass Lewis spokesperson said via e-mail it welcomed the recent decisions. “These rulings safeguard core First Amendment principles by rejecting speaker and viewpoint discrimination and ensure we can continue to deliver the objective research that our clients have come to expect,” this person said.

The Texas and Kansas suits remain pending in federal courts. ISS and Glass Lewis also sued to block enforcement of a similar rule in Kentucky. Separately ISS and Glass Lewis were sued by Florida over consumer protection and antitrust allegations, which both deny, and ISS has vowed to fight similar suits in four other states.