FILE PHOTO: The flag of the U.S. state Texas is seen in this illustration taken, August 21, 2024. REUTERS/Dado Ruvic/Illustration/File photo

By Jonathan Stempel

(Reuters) -A federal judge on Friday blocked Texas from enforcing a first-of-its-kind state law restricting Glass Lewis and ISS, two of the best known proxy advisers, from advising shareholders on diversity, environmental and governance practices.

U.S. District Judge Alan Albright in Austin, Texas, issued preliminary injunctions against the state's Republican Attorney General Ken Paxton, after Glass Lewis and ISS said the law would unconstitutionally force them to convey Texas' preferred views on hot-button issues.

Paxton's office did not immediately respond to requests for comment.

Signed in June by Republican Governor Greg Abbott, Senate Bill 2237 targeted "non-financial" advice on diversity, equity and inclusion (DEI) matters, and environmental, social and governance (ESG) matters.

The law requires proxy advisers to tell clients that such advice does not solely serve shareholders' financial interests, and to provide financial analyses supporting the advice.

Glass Lewis and ISS sued on July 24, accusing Texas of undermining their First Amendment right to advise clients, including advice viewed as politically left-of-center.

The law was to take effect on September 1.

In seeking dismissals, Paxton said Glass Lewis and ISS didn't show the law would harm client relationships. He also said requiring factual "non-ideological" disclosures wouldn't force proxy advisers to take political sides.

The law "applies equally to each party in the debate and will be enforced accordingly," Paxton said.

In separate statements, Glass Lewis and ISS welcomed the injunctions. ISS said it provides clients with "rigorous, fact-based analysis" and remains committed to transparency, independence and helping investors meet their fiduciary duties.

Many companies this year have scaled back or ended support for DEI programs. Republican President Donald Trump has made eliminating those programs a high priority.

Glass Lewis said it has more than 1,300 institutional investor clients, while ISS said it provided voting advice to about 2,000 clients last year.

The cases are Glass Lewis & Co v Paxton, U.S. District Court, Western District of Texas, No. 25-01153; and Institutional Shareholder Services Inc v Paxton in the same court, No. 25-01160.

(Reporting by Jonathan Stempel in New York; Additional reporting by Mike Scarcella; editing by Diane Craft and Leslie Adler)