Texas Governor Greg Abbott recently signed into law S.B. 2337, marking a significant development in the increasing scrutiny of proxy voting as a focus of regulators targeting environmental, social, and governance (ESG) investing, including by institutional investors such as public and private retirement plans.
The June 20 law imposes two new disclosure obligations on proxy advisory firms with respect to their services to shareholders of companies based in Texas and headquartered in the state.
In passing this bill, the Texas legislature described it as designed to increase transparency around the influence of nonfinancial factors—particularly ESG considerations—on proxy voting recommendations.
S.B. 2337 applies broadly to “proxy advisory firms,” defined as any person or entity who, for compensation, provides proxy advisory services to shareholders or other interested parties. “Services” is defined extremely broadly to include not just vote recommendations, but proxy statement research, governance ratings, and policy development.
The law applies when such services relate to
The law uses an extremely broad definition of proxy advisory firms and services, such that it could be potentially interpreted as applying to entities providing services beyond traditional voting recommendations and activities (such as research or investment management). However, the legislative history indicates that the bill was intended to specifically target only traditional proxy voting firms.
The law requires two distinct disclosures, which we explore below.
Disclosure When Advice Is Not Provided ‘Solely’ in the Financial Interest of Shareholders
The first disclosure requirement is triggered if a proxy advisor provides services that are not provided solely in the financial interest of the shareholders. Under the rule, this concept is triggered in a number of ways including if the services “wholly or partly” take into account “nonfinancial” factors, including a commitment, initiative, policy, target, or subjective or value-based standard based on ESG, social credit/sustainability scores, or membership in value-based groups; and/or if the vote goes against a board recommendation or votes against a board slate (without satisfying certain other requirements under the rule).
If triggered, the first disclosure must
This notice must be sent to the covered shareholder clients and to the Texas-based issuer. A similar, but less detailed, posting is also required on the proxy advisor’s homepage.
Disclosure of Materially Different Recommendations
The second disclosure requirement is triggered if a proxy advisor gives “materially different” advice or vote recommendations on the same proposal to clients who have not expressly requested services for a nonfinancial purpose. For this purpose, “materially different” includes recommending differing votes on the same proposal, or recommending a vote against management’s recommendation.
If triggered, this second disclosure must identify the advice as not provided solely in the financial interest of the shareholders, must identify the “specific financial analysis” supporting the advice or recommendation, and must disclosure which of the differing recommendations is based solely in the financial interest of the shareholders.
This notice must be sent to the covered shareholder clients and to the Texas-based issuer. A similar posting is also required on the proxy advisor’s homepage. In addition, this second notice must go to the Texas Attorney General as well.
Violations of these disclosure requires are classified by the law as deceptive trade practices under the Texas Business and Commerce Code, enforceable by the covered companies, covered shareholders, or the attorney general.
In passing the legislation, Texas lawmakers expressed concern that proxy advisors may incorporate “political,” “ideological,” and non-domestic influences into their recommendations. Legislators emphasized that such considerations could impact the financial outcomes for Texas-based institutional investors and public pension beneficiaries. S.B. 2337 was positioned as a transparency measure, rather than a restriction on speech or content.
To mitigate the risk of federal preemption under the Investment Advisers Act, the bill underwent revisions prior to enactment. These included refining the definitions, shifting to fact-based disclosures, and focusing enforcement through deceptive practices provisions rather than regulating substantive voting advice.
This law comes at a time of increasing scrutiny of proxy voting as a number of state and federal regulators have shifted the regulatory attack on ESG investing from traditional asset management activities unto proxy voting (as we have previously covered). For example, within days after this rule being passed, the US House of Representatives’ antitrust subcommittee held hearings that accused proxy advisor firms of antitrust violations and acting as “unsupervised referees for every major corporate decision in America.” In this regard, Texas’s S.B. 2337 reflects a growing trend of state-level scrutiny of proxy voting and ESG-related practices.
The law takes effect on September 1, 2025 and applies only to proxy advisory services provided on or after that date.
There has been immediate criticism of the law as being, among other things, overly broad and difficult to administer. The criticism includes logistical concerns about implementation, particularly around the challenge of delivering real-time tailored disclosures across a broad client base. Clients often receive customized recommendations reflecting their specific investment goals and proxy voting policies, which may or may not prioritize financial factors exclusively. Distinguishing which recommendations trigger the new disclosure obligations may require significant operational challenges.
In addition, firms have noted the potential for fragmentation if other states adopt similar but nonidentical rules. While S.B. 2337 does not prohibit nonfinancial voting considerations, it imposes new procedural and reporting burdens that could influence how proxy policies are formulated, especially for firms serving multijurisdictional clients.
Accordingly, it remains presently unclear how proxy advisory firms (and potentially other captured by the law’s broad definition of “proxy advisory services”) will be able to develop compliance systems (especially in time for the fall).
For companies and shareholders, the law enhances disclosure-driven transparency—but may also introduce complexity.
The proxy advisory landscape is undergoing significant change as states like Texas introduce new disclosure requirements aimed at increasing transparency around ESG and voting recommendation practices. Staying informed about these evolving state-level rules—and understanding how they intersect with federal obligations—is essential for mitigating compliance risks and avoiding enforcement actions.
We stand ready to assist companies, institutional investors, and proxy advisory firms in assessing the impact of S.B. 2337, developing effective disclosure processes, and navigating the complexities of this ESG regulatory environment.
To ensure that clients are armed to navigate this continuously and quickly evolving legal environment, our team maintains a detailed chart with proprietary analysis of each state’s ESG-related legislative efforts, updated and emailed to subscribers monthly. To learn more about this offering or discuss any specific questions, please email the authors of this Lawflash or your usual Morgan Lewis contacts.
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