Winter 2026 ESG Investing Quarterly Update

This update summarizes key recent developments regarding legislative, regulatory, litigation, and enforcement updates related to environmental, social, and governance (ESG), with a particular focus on federal agency enforcement trends and executive orders, state proxy voting and disclosure laws, and climate initiative updates.

ESG investing continues to be subject to political attention, with related regulatory and litigation challenges. From state laws regulating ESG-investment considerations and disclosure mandates to efforts by the US administration to rescind or replace prior federal guidance, the ESG landscape is rapidly evolving in both substance and focus. For asset managers, fiduciaries, and companies, these developments raise increasingly complex compliance considerations and legal risks.

FEDERAL UPDATE

ESG investing continues to be a focus of federal activities across the White House, the US Congress, and federal regulatory agencies.

US Executive Order Targets Proxy Advisors and ESG-Related Voting Practices

On December 11, 2025, President Donald Trump issued an executive order (EO) titled Protecting American Investors from Foreign-Owned and Politically-Motivated Proxy Advisors. The EO states that Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co., LLC (Glass Lewis) wield outsized influence over corporate governance matters—including with respect to corporate governance, shareholder proposals, board composition, executive compensation, capital markets, and retirement investing—and use that influence “to advance and prioritize radical politically-motivated agendas” related to ESG.

The EO directs (1) the US Securities and Exchange Commission (SEC) to conduct a comprehensive review of the existing regulatory framework governing proxy advisors, (2) the Federal Trade Commission (FTC) to examine ongoing state antitrust investigations involving proxy advisors and determine whether they engage in unfair methods of competition, and (3) the US Department of Labor (DOL) to assess regulations under the Employee Retirement Income Security Act of 1974 (ERISA) to ensure that “proxy advisors act solely in the financial interests of plan participants.”

The FTC and DOL are reported to have already begun responding to aspects of these directives. In November 2025, the FTC announced that it had launched an investigation into major proxy advisory firms for potential antitrust violations related to guidance on politically sensitive shareholder votes.

Meanwhile, the DOL has publicly announced a commitment to issuing a new rule to replace the regulation issued during the Biden administration titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (the ESG Rule), which has been interpreted as permitting certain ESG strategies or factors to satisfy ERISA fiduciary duties. The regulatory agenda identifies the new rule as expected to be finalized by May 2026. As discussed below, there are also efforts on the Hill to amend ERISA to limit ESG investment considerations by ERISA fiduciaries.

• You can read our analysis of the DOL’s plans on the ML BeneBits blog and find more information about the EO in our LawFlash.

Proxy Firms Announce Substantive Changes to Voting Policies

The EO follows recent announcements by ISS and Glass Lewis regarding significant changes to their voting policies. In October 2025, Glass Lewis announced that beginning in 2027, it will no longer publish a single set of “benchmark” voting policies and will instead offer customized voting policies on a client-by-client basis. Firm leadership cited various factors—including diverging investor priorities regarding issues such as sustainability, particularly with respect to sustainability-related issues—as a key driver of the shift. While the new policies remain under development, Glass Lewis stated that the goal is to remove the “perception of influence and [transform] proxy voting into a more strategic and client-driven experience.”

Similarly, in updated guidelines published in November 2025, ISS announced that beginning in February 2026, it will move away from blanket ESG voting policies, including default support for shareholder proposals requesting climate-and diversity-related disclosures. Instead, ISS will assess disclosure requests—covering climate risk, emissions, workforce diversity, and related topics—on a case-by-case basis. ISS leadership cited declining shareholder support for ESG proposals, regulatory developments, and improvements in company disclosure practices as reasons for the change.

Net Zero Financial Service Providers Alliance Announces Reorganization

On January 28, 2026, the Net Zero Financial Service Providers Alliance (NZFSPA)—a net-zero framework and coalition that launched in September 2021—announced it will no longer operate as a standalone initiative. Following the publication of target-setting frameworks across its groups, NZFSPA members will “pursue their activities” independently, including through integration into other existing forums and working groups.

Congress’s Efforts to Amend ERISA to Limit ESG Investing

On October 31, 2025, Republican Senators Bill Cassidy (R-La.) and Jim Banks (R-Ind.) introduced two bills addressing fiduciary duties and investment disclosures under ERISA. The Restoring Integrity in Fiduciary Duty Act (S.3086), introduced by Senator Cassidy, would require 401(k) plans and pension funds to consider only pecuniary factors when making investment decisions. The proposal builds on similar legislation (H.R. 2988) advanced by a House committee in June 2025.

Meanwhile, the Providing Complete Information to Retirement Investors Act (S.3083), introduced by Senator Banks, would require employer-sponsored retirement plans to disclose specified information to employees, distinguishing fiduciary-managed investments from participant-directed investments.

On January 15, 2026, the House passed H.R. 2988, the Protecting Prudent Investment of Retirement Savings Act, by a narrow 213–205 vote. The bill, sponsored by Representative Rick W. Allen (R-Ga.), would codify a “pecuniary-only” investment standard for ERISA retirement plan fiduciaries, effectively requiring plan sponsors and advisers to prioritize financial returns and economic factors over ESG considerations when making investment decisions on behalf of participants and beneficiaries. Under the legislation, fiduciaries must base decisions on factors that are expected to have a material effect on risk or return consistent with the plan’s objectives and may consider non-pecuniary factors only where it can be demonstrated that alternatives are indistinguishable based on pecuniary factors alone. H.R. 2988 would also largely supersede the Biden-era DOL guidance that permitted consideration of ESG factors in retirement investing and aims to reinforce ERISA’s loyalty and prudence requirements for plan fiduciaries. The bill moved to the US Senate for further consideration.

STATE UPDATE

States legislatures and regulators continue to advance both “pro-ESG” and “anti-ESG” investing rules, with increasing scrutiny of ESG-related investment practices.

Texas’ Anti-ESG Law Deemed Unconstitutional

A US federal judge in Texas (Judge Alan Albright) granted a partial summary judgment holding Texas’ S.B. 13 unconstitutional. S.B. 13 is one of the original state anti-ESG or “boycott” laws and restricts Texas from investing in or contracting with firms deemed to “boycott” the fossil fuel industry. The court held that the law violates the First and Fourteenth Amendments because it penalizes businesses for their speech and investment decisions and is overbroad and vague in defining prohibited conduct. Notably, in August 2025, Judge Albright had also enjoined enforcement of Texas’s proxy voting and ESG-related disclosure law (S.B. 2337) on constitutional grounds.

New State-Level ESG Investing Proposal: Michigan

In November 2025, Michigan state legislators proposed H.B. 5237, which would impose stricter standards on fiduciaries managing public employee retirement system assets. The bill provides that fiduciaries must act solely in the pecuniary interest of participants and beneficiaries when evaluating an investment. Fiduciaries should also not follow the recommendations of proxy advisors, unless the proxy advisor commits to following proxy voting guidelines aligned with that pecuniary-only standard.

Nonprofits Challenge Texas S.B. 2337; State Dismisses Appeal of the Preliminary Injunction

On November 10, 2025, a coalition of Texas nonprofits filed a lawsuit challenging Texas S.B. 2337, which imposed disclosure obligations on proxy advisory firms with respect to their services to shareholders of companies based in Texas. The complaint alleges that the law violates the First and Fourteenth Amendments. The plaintiffs argue that the statute’s requirement to label advice incorporating ESG or other “nonfinancial” considerations as unrelated to shareholders’ financial interests constitutes unconstitutional compelled speech—including for faith-based investors whose recommendations are grounded in religious values. They further contend that the law is overly broad and vague, exposing nonprofits and smaller organizations engaged in shareholder advocacy, investment research, or public education to potential penalties.

The lawsuit follows a prior preliminary injunction obtained by ISS and Glass Lewis, further escalating legal challenges to Texas’s anti-ESG regulatory framework.

• Please find the complaint here.

In filings submitted on November 24, 2025, Texas Attorney General Ken Paxton announced that the state has abandoned its appeal of the district court’s grant of the preliminary injunction regarding S.B. 2337, citing the low likelihood that the appeal would be resolved before the February 2026 trial. Texas had previously filed a notice of appeal on September 18, 2025 in the cases involving both ISS and Glass Lewis.

Florida Attorney General Sues Proxy Advisory Giants for Deceiving Investors and Manipulating Corporate Governance

On November 20, 2025, the Florida Attorney General filed suit against ISS and Glass Lewis, alleging “anticompetitive” conduct, investor deception, and weaponization of influence to “impose [a] radical ideological agenda” on American companies and Florida consumers through the use of “lockstep” voting that stifles competition and harms shareholders.

• Please find a copy of the redacted complaint here.

State-Level Climate Disclosure Rules - California

On November 18, 2025, the US Court of Appeals for the Ninth Circuit granted a motion to enjoin enforcement of S.B. 261—California’s climate-related financial risk disclosure law—while allowing the implementation of its companion bill, S.B. 253 (the state’s mandatory greenhouse gas emissions disclosure law), to proceed. Oral arguments were heard on January 9, 2026.

In response, the California Air Resources Board (CARB) issued an Enforcement Advisory confirming it will not enforce S.B. 261’s January 1, 2026 statutory deadline and opened a voluntary reporting docket through July 1, 2026, for entities that may choose to submit disclosures anyway.

At a November 2025 virtual public workshop, CARB provided additional guidance regarding coverage criteria, parent-level reporting, and fee administration for both laws. CARB proposed an August 10, 2026 deadline for initial Scope 1 and Scope 2 emissions reporting under S.B. 253 and released an updated reporting checklist for S.B. 261.

• For more information on the injunction and CARB’s workshop, please see our LawFlash here.

On December 9, 2025, CARB published a notice of public hearing on proposed implementing regulations for S.B. 253 and S.B. 261, accompanied by a staff report. The proposal would formalize definitions, establish fees, and set initial reporting deadlines. CARB scheduled a public hearing for February 26, 2026, and the public comment period on the proposed regulations closed on February 9, 2026.

• For more information on this update, please see our LawFlash here.

CLIMATE INITIATIVES

Net Zero Asset Managers Issues a New Set of Commitments for Signatories

The Net Zero Asset Managers (NZAM) initiative announced it will relaunch this month and released a revised commitment statement that retains NZAM’s core substance and focus (including alignment with the Paris Agreement’s 1.5°C goal) but eases certain requirements for signatories. The number of individual requirements has been reduced, and the prior timeline that required action by 2050 has been removed. The new commitment also posits climate change considerations as financial in nature and part of fiduciary duties, which appears to provide a limiting carveout to reflect diverse jurisdictional realities.

These changes follow mounting political and regulatory pressure on ESG-focused alliances, prompting NZAM to pause operations in October 2025 and review its framework.

• Please find the statement released by NZAM here.

NYC Comptroller Pressures Asset Manager over Climate Stewardship Gaps

In contrast to the anti-ESG activities reported above, the Office of the New York City Comptroller has publicly criticized a large equity asset manager for taking an overly conservative approach to climate engagement with US companies and recommending termination of a major equity mandate. The comptroller cited the firm’s bifurcated stewardship policies, limited adoption of a robust climate framework, and restrictive interpretation of the new SEC rules limiting proactive engagement.

The comptroller noted that the firm engages robustly outside of the United States, where constraints regarding the new SEC ownership reporting and engagement rules do not apply. Although the firm defended its practices, warning against politicizing pension decisions, this report is an example of some states’ pressure to demonstrate consistent climate-stewardship practices.

CONCLUSION

In today’s environment, ESG investing has become a legal and regulatory flashpoint. The patchwork of state legislation, shifting federal policy, and heightened enforcement posture presents significant challenges for asset managers, fiduciaries, and companies navigating ESG-related obligations. Regulatory uncertainty, litigation risks, and disclosure demands are mounting—and the pace of change shows no signs of slowing.

HOW WE CAN HELP

Our team closely monitors these developments and advises clients across sectors on how to manage ESG risks, implement compliant investment strategies, and respond to emerging legislation. We bring together legal, regulatory, and policy know-how to help clients stay informed and agile in a politically and legally charged ESG environment.

If you have questions about any of the developments discussed in this update—or how they may affect your investment practices, fiduciary obligations, or reporting strategies—please contact the authors or your regular Morgan Lewis contact.

Legal practice assistants Mia Deck and Brian Harbaugh contributed to this Insight.