Corporate Governance in Texas: Implications for Investors and ESG Standards

US companies are increasingly reincorporating in Texas, a state that is actively positioning itself as a hub for corporate governance. This has implications for investors, who must weigh the implications for strategy, governance, and ESG standards. Texas has established a dedicated business court and passed new laws to compete with Delaware, the historic center of US incorporations. Investors must carefully consider these changes and their impact on their investments.

US companies are increasingly reincorporating in Texas, a state that is actively positioning itself as a hub for corporate governance. This has implications for investors, who must weigh the implications for strategy, governance, and ESG standards. Texas has established a dedicated business court and passed new laws to compete with Delaware, the historic center of US incorporations. Investors must carefully consider these changes and their impact on their investments.

A recent development in Texas law has sparked a legal challenge that could significantly impact the proxy advice landscape. On July 24, 2025, proxy advisers Glass Lewis and ISS sued the state of Texas to block a new law that limits their ability to advise shareholders on diversity, equity, and inclusion (DEI) and environmental, social, and governance (ESG) matters [1]. The law, signed by Republican Governor Greg Abbott in June, requires proxy advisers to disclose that their advice is not solely in the financial interest of the company's shareholders and to provide financial analyses supporting their recommendations.

The law targets "non-financial" advice on DEI and ESG matters, including for votes at shareholder meetings. It compels proxy advisers to conspicuously tell clients that the advice is "not being provided solely in the financial interest of the company's shareholders," and to provide financial analyses supporting the advice [1]. This law takes effect on September 1, 2025.

Glass Lewis and ISS argue that the law violates their First Amendment right to advise clients, even if the state does not like the advice. They maintain that the law would force them to broadcast Texas' preferred viewpoints, potentially harming their reputations and losing clients [1]. The law is seen as an attempt to protect corporate directors and management, potentially undermining shareholders' important check and balance against boards [1].

The legal battle could have significant implications for investors. Proxy advisers play a crucial role in guiding shareholders' votes at annual meetings, and any restrictions on their ability to provide unbiased advice could lead to less informed voting decisions. Moreover, the law could influence companies' ESG standards and DEI practices, potentially affecting their long-term performance and investor sentiment.

Investors must carefully consider the potential impact of this law on their investments. While Texas is positioning itself as a favorable state for corporate governance, the new law on proxy advice could introduce new complexities and risks. As the legal battle unfolds, investors should stay informed and adapt their strategies accordingly.

References:
[1] https://www.reuters.com/legal/government/glass-lewis-iss-sue-texas-over-law-limiting-dei-esg-proxy-advice-2025-07-24/