The Texas Attorney General filed a lawsuit yesterday against ISS, alleging that the firm violated the Texas Deceptive Trade Practices Act. A simultaneous filing was made by the West Virginia Attorney General in a separate, but substantially similar case. Texas and West Virginia argue that ISS improperly considers ESG factors that are unrelated to financial returns and that this consideration misleads its clients. The Texas lawsuit summarizes these allegations, stating:
“ISS’s advertising is deceptive as it fails to adequately inform clients of its ESG initiatives. Specifically, the company incorporates these financially imprudent ideologies into its ‘Benchmark’ objective analyses, without providing empirical support for its preferences or emphasizing the opportunity costs to the investor’s bottom line. By excluding financial analyses in these benchmark reports, ISS fails to show whether the ESG-oriented advice given was designed to be in clients’ best financial interests, as advertised. This is also a violation of ISS’s fiduciary duty as a proxy advisor to provide such advice, and misleading to Texas consumers who depend on such advice to grow their pensions and other investment accounts. It also stands in contrast to current financial market and political trends regarding ESG.”
There are quite a few holes in these arguments. For one, in 2025, ISS backed very few shareholder proposals. Additionally, the states argue that considering ESG factors compromises the independence and objectivity of ISS. This argument fails to recognize that ESG and climate risk management can be considered independently and objectively. Acknowledging ESG risks is not a political stance. ISS seemingly has ample defenses in both cases. However, the anti-ESG movement has a track record of getting settlements out of meritless litigation.
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