A U.S. court has struck down a challenge to the U.S. Securities and Exchange Commission’s proposed rules requiring investment funds to disclose their votes on ESG issues.

The U.S. Fifth Circuit Court of Appeals rejected a challenge from the states of Texas, Louisiana, Utah and West Virginia to a new SEC rule requiring funds to disclose their proxy votes on ESG matters, which is slated to take effect July 1.

During the rule-making period, certain states argued that requiring the disclosure of funds’ ESG votes could empower activists to pressure funds into voting for pro-ESG measures, potentially causing fund managers to breach their fiduciary duties.

The states argued they had standing to challenge the rule on the basis that, as investors, they will suffer if the rule is allowed to take effect. Additionally, they argued they should have standing to defend their citizens’ economic well-being.

The court ruled against the states.

Ultimately, the court found the possibility that investors would face higher costs due to an increased regulatory burden was speculative: “Evidence that funds may increase costs for investors is too hypothetical to support a claim of standing.”

Further, “the states have not offered sufficient evidence that the funds will indeed pass costs on to investors,” the court said.

The states also argued the rule would damage the oil and gas industries in Texas by making it easier for activists to force funds to divest from energy producers, but the court rejected that argument.

“Without more evidence of the economic impact of the categorization requirement on Texas’s citizens, we have no need to determine whether the state can bring a suit against the federal government on these grounds,” the decision said.

The court’s decision said the states could refile their action with stronger evidence, and noted the added disclosure may not solely benefit pro-ESG positions.

“To be sure, the states that brought this petition presumably believe that the SEC promulgated this rule in order to [favour] one side of these social controversies. But the law of unintended consequences teaches us that any rule can have unanticipated effects,” the decision said.