Texas oversteps boundaries with its fresh anti-ESG legislation
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Texas is set to introduce a new law in September that could significantly impact proxy advisory firms, particularly those that consider environmental, social, and governance (ESG) factors in their voting recommendations. Known as Senate Bill 2337, the law aims to refocus proxy advisory services on shareholders' short-term financial interests by constraining ESG-driven advice within Texas.
The law mandates proxy advisors to disclose if their advice subordinates financial interests to ESG or other nonfinancial objectives. Failure to comply with these disclosure requirements could result in fines up to $10,000 per violation (higher if seniors are affected), and may expose firms to private lawsuits from shareholders or companies affected by their proxy advice.
The implications of this law are far-reaching. Proxy advisors may limit or alter ESG-related recommendations to avoid penalties or reputational risk, potentially diminishing the role of ESG considerations in shareholder voting and corporate governance decisions in Texas companies.
The law has already sparked legal challenges. ISS and Glass Lewis, two prominent proxy advisors, have sued the Texas government, arguing that the law infringes on their First Amendment rights by compelling disclosures of their methodologies. The outcome could set a nationwide precedent on state regulation of proxy advice and free speech.
The law is part of a wider trend in several states, including Oklahoma and Missouri, pushing back against ESG integration in proxy voting. This reflects a broader ideological debate over the role of social considerations in fiduciary duties.
Despite these challenges, Texas has scored some wins in its strategy. Companies like Tesla and SpaceX have moved their legal domiciles to the state. However, the law has raised questions about the understanding of the proxy advisory business and the financial sector as a whole by Texas's leaders.
The boom in energy-hungry artificial intelligence has vital implications for the energy transition, as explored in a data-rich FT story. The redistricting law in question, backed by former President Donald Trump, is seen as tilting future elections against the Democratic party. The power struggle in Texas has implications that reach beyond the state's borders.
[1] Senate Bill 2337: https://capitol.texas.gov/BillLookup/History.aspx?LegSess=87R&Bill=SB2337 [2] ISS and Glass Lewis Sue Texas Over Proxy Advisory Law: https://www.bloomberg.com/news/articles/2021-07-28/iss-glass-lewis-sue-texas-over-proxy-advisory-law-fiduciary-duty [3] Texas Proxy Advisory Law: What Investors Need to Know: https://www.investopedia.com/articles/investing/100516/texas-proxy-advisory-law-what-investors-need-know.asp [4] Texas Governor Orders Arrest of Democratic Lawmakers: https://www.reuters.com/world/us/texas-governor-orders-arrest-democratic-lawmakers-blocking-redistricting-vote-2021-07-12/ [5] The Boom in Energy-Hungry AI Has Vital Implications for the Energy Transition: https://www.ft.com/content/c70475e0-e48a-4345-a6a4-e8e27f3d7b3f
- The new law, Senate Bill 2337, could influence investment strategies, as it aims to refocus proxy advisory services on shareholders' short-term financial interests and may alter ESG-related recommendations.
- The financial consequences of noncompliance with the law are severe, with fines up to $10,000 per violation and potential exposure to private lawsuits.
- The legal challenges to Senate Bill 2337, led by proxy advisors ISS and Glass Lewis, could set a nationwide precedent on state regulation of proxy advice and free speech in finance and business.
- This law is part of a broader trend in several states, including Oklahoma and Missouri, that question the role of social considerations in fiduciary duties, leading to a debate over policy-and-legislation and politics.
- The implications of this law extend beyond Texas, as it could impact general-news and business sectors, particularly in the realm of energy, due to the energy-hungry artificial intelligence boom.
