On January 17, Utah Attorney General Sean Reyes (R), on behalf of a 21-state coalition, sent a letter to the CEOs of the two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass, Lewis & Company. The letter alleged the proxy advisors potentially violated their legal and contractual duties to advisees by “pledg[ing] to recommend … against” proposals that failed to implement environmental and social goals adequately. The letter also requested written assurances to cease the potential violations.

Proxy advisors like ISS and Glass, Lewis & Company must follow federal and state laws, as well as abide by investment contract terms with state investment vehicles. In his letter, AG Reyes reminded the companies of their responsibility to (1) abstain from providing recommendations that contain false or misleading information; (2) maintain duties of care and loyalty for proxy voting; (3) abstain from engaging in unfair or deceptive trade practices; and (4) consider only those factors related to the economic value of the investment under the proxy advisors’ agreements with state investment vehicles.

Yet, rather than advising shareholders based solely on economic value, AG Reyes claimed the firms instead balanced environmental and social factors outside their purview in making investment decisions. He then provided evidence that the firms prioritized environmental and social factors. For example, AG Reyes cited ISS’ own declaration that it would generally vote against directors who fail to implement net-zero emissions goals adequately. ISS allegedly made the declaration even though “it is far from certain that [achieving net-zero emissions] will occur.” And considering that “no rational actor would incur the massive expense” to achieve net-zero emissions absent a government mandate, AG Reyes concluded that the company must be acting “consistent with [its] political beliefs” and “contrary to [the] duty to focus on a company’s financial interests.”

Why It Matters

Since early 2022, Republican AGs have challenged the ESG movement and explored various legal arguments to eliminate the practice among asset managers, utilizing the ESG practice with public funds management. While AG Reyes’ letter denotes the latest phase of this saga, Republican challenges to the ESG movement will likely continue for the foreseeable future. Accordingly, companies that manage public funds and implement ESG policies/practices should carefully consider whether their use of ESG could be construed as state or federal law violations.

Troutman Pepper State Attorneys General Team

	Ashley Taylor – Co-leader and Firm Vice Chair Ashley is a partner in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group and co-leader of the State Attorneys General practice. He focuses primarily on federal and state government regulatory and enforcement matters involving state attorneys general, the Consumer Financial Protection Bureau (CFPB), and the Federal Trade Commission (FTC). Drawing upon his experience as a deputy attorney general, Ashley has developed an extensive consumer practice with regard to the consumer financial services industry.
	Clay Friedman – Co-leader Clay is a partner in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group and co-leader of the State Attorneys General practice. Informed by nearly a decade in a state attorneys general office, and more than 25 years in private practice, Clay spends much of his time representing clients in singular or multistate regulatory actions. Clay has repeatedly led teams before all 50 state attorneys general and also handles matters with the Federal Trade Commission, the Consumer Financial Protection Bureau, and other local, state and federal agencies.
	Stephen Piepgrass Stephen represents clients interacting with, and being investigated by, state attorneys general and other enforcement bodies, including the CFPB and FTC, as well as clients involved with litigation, particularly in heavily regulated industries.
	Michael Yaghi Michael handles high-profile state attorneys general, FTC, and CFPB investigations by advising clients through these complex government inquiries. He assists clients through the entire life cycle of investigations, from regulatory enforcement through formal litigation.
	Ketan Bhirud As a former government official at the state and federal level, Ketan leverages extensive experience in the public and private sectors to skillfully represent client interests.
	Avi Schick A former deputy attorney general of New York, Avi applies his experience in bet-the-company matters, representing clients in criminal and civil investigations and enforcement actions before state and federal regulators, prosecutors and enforcement agencies.
	Chris Carlson Chris represents clients in regulatory, civil and criminal investigations and litigation. In his practice, Chris regularly employs his prior regulatory experience to benefit clients who are interacting with and being investigated by state attorneys general.
	Natalia Jacobo Natalia is an associate in the firm’s business litigation practice. She recently received her J.D from the University of California, Davis School of Law.
	Namrata Kang Namrata is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group, based in the Washington, D.C. office. Her work includes advising clients in regulatory investigations and compliance matters, in addition to representing clients in civil litigation matters.
	Susan Nikdel Susan is an associate in the firm’s Consumer Financial Services Practice Group, and focuses her practice on consumer financial services matters. She has defended several of the nation’s largest and most influential financial institutions in individual and class action litigation involving the Telephone Consumer Protection Act (TCPA), Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), and other consumer privacy statutes. Susan also represents banks, fintechs, and financial services companies in connection with regulatory examinations and investigations brought by the CFPB, state attorneys general, and the California Department of Financial Protection and Innovation.
	Whitney Shephard Whitney is an attorney in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group. She represents clients facing state and federal regulatory investigations and enforcement actions, as well as related civil litigation.
	Trey Smith Trey is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement practice. His experience includes serving as a summer associate at the firm in 2021.
	Daniel Waltz An experienced litigator, Daniel advises and represents regional, national and international companies, financial institutions and insurers in all facets of business, complex commercial and insurance coverage litigation. He is committed to working with his clients to find creative solutions to meet their needs.
	Stephanie Kozol Stephanie is Troutman Pepper’s senior government relations manager in the state attorneys general department.