Fifth Circuit Upholds (For Now) SEC Rules Concerning ESG Proxy Votes

On May 10, 2024, the Fifth Circuit rejected an attempt by the States of Texas, Louisiana, West Virginia, and Utah to invalidate an SEC rule “requiring funds to disclose their votes on environmental, social, and governance (ESG) matters.”  Specifically, the rule in question requires that funds “categorize [proxy] votes by subject matter,” and identifies fourteen categories, of which “four . . . are ESG-focused.”  A concern voiced by critics is that this type of categorization of proxy vote could ultimately discourage investment in industries, such as fossil fuel extraction, that are disfavored by ESG-focused investors. 

Significantly, the grounds for this decision--by a court known to be conservative--may discourage similar lawsuits in the future, as the Fifth Circuit ruled that the states had failed to establish standing--i.e., a right to pursue their claims in this forum.  In particular, the Fifth Circuit focused on the lack of injury--that the States had offered “only speculation about the possibility of increased costs to investors as a result of new regulatory burdens on the funds.”  In the absence of specific evidence of concrete harm, the court concluded that standing did not exist, whether directly or on a parens patriae basis (where a state asserts claims on behalf of its citizens).  

However, this victory by the SEC may be short-lived.  In a concurring opinion by Judge Ho, he agreed that “there is not sufficient evidence in the record to establish the States' standing . . . [but] if the States believe that they can assemble stronger evidence of injury than that presently available in this record, they may refile.  And it appears that the States believe that they can.”  In effect, Judge Ho was inviting a subsequent challenge to the law that would rely upon a more robust record that would remedy the procedural defect that the Fifth Circuit had identified here.  And such an invitation suggests that some jurists on the Fifth Circuit would welcome the opportunity to rule on the merits--presumably against the SEC.