US states escalate legal battle against proxy adviser ISS over ESG practices

Attorneys general from Texas, Iowa, Nebraska and West Virginia have filed state court lawsuits against Institutional Shareholder Services (ISS), alleging the proxy adviser violated state consumer protection and deceptive trade practices laws by integrating environmental, social and governance (ESG) considerations into its advice without assessing financial impacts. The suits accuse ISS of abusing its market influence to advance ESG goals, contradicting its claims of impartiality.

The litigation brings the total number of state actions against ISS to five, following a similar suit by Florida in November. Texas Attorney General Ken Paxton, a Republican Senate primary candidate, led the lawsuits, alleging ISS abused its market influence to push what he described as "woke ideology" and cause financial damage. Texas is seeking over $1 million in total damages and an injunction to stop the alleged deceptive practices.

The lawsuits claim ISS issued ESG metrics without studying their financial impact, contradicting its claims of offering "objective and impartial" advice. The state AGs allege that the company has used its size to influence company boards and further its own ESG goals. The suits seek to enjoin ISS from the alleged deceptive practices, including allegations of failing to disclose how ESG considerations may impact proxy advice.

ISS has launched a project called "Protect the Voice of Shareholders" to counter what it calls misinformation, claiming it is indifferent to proxy vote outcomes and makes opposing recommendations based on client policies. An ISS spokeswoman told ESG Dive that the allegations lack merit and the firm will vigorously defend against them. The company stated its research and vote recommendations are based on the proxy voting policies clients have selected.

The states have formed a Multistate Proxy Advisor Coalition to coordinate their legal efforts, with Texas seeking over $1 million in damages and an injunction. The coalition includes 13 states beyond the five that have sued: Alabama, Alaska, Indiana, Kansas, Kentucky, Missouri, Montana, South Carolina, South Dakota, Tennessee and Utah. The legal action follows a September probe by Paxton into ISS and Glass Lewis, which together account for an estimated 97% of the proxy advisory market.

President Trump issued an executive order in December targeting "foreign-owned and politically-motivated" proxy advisers, naming ISS and Glass Lewis, and directing federal agencies to review state-level litigation and potential antitrust violations. The order directed the Securities and Exchange Commission, Department of Labor and Federal Trade Commission to make changes to the shareholder process and determine whether the firms have violated antitrust laws.

The proxy advisory industry plays a significant role in how billions of dollars are invested and managed across the US, with ISS and Glass Lewis previously securing a preliminary injunction against a Texas law targeting proxy advisers. The new lawsuits allege varying counts of violations of consumer protection laws, with a range of requested damages across the participating states.