Summer 2026 ESG Investing Update

ESG investing continues to be subject to regulatory and litigatory attention. For asset managers, fiduciaries, and companies, these developments raise compliance and legal considerations. In this update we examine activity at the SEC, DOL, and state levels as well as recent litigation and climate initiatives.

This update summarizes key recent developments regarding legislative, regulatory, litigation, and enforcement updates related to environmental, social, and governance (ESG) investing, with a particular focus on federal and state laws and enforcement actions.

SEC UPDATES

There have been a number of updates related to the US Securities and Exchange Commission’s approach to ESG, including the following:

SEC Rescinds 2024 Climate-Related Disclosure Rule

In May, the SEC proposed the Rescission of Climate-Related Disclosure Rules, reversing a Biden-era initiative that required public companies to provide disclosures regarding climate risk and certain greenhouse gas emissions in SEC filings. The proposed rulemaking follows significant legal challenges to the rules and the staying of the rule in April 2024 pending judicial review.

Following the 2024 elections, the SEC withdrew its defense of the rules. According to the SEC, the rescission reflects broader concerns that the rules would be costly and exceed their statutory authority. If finalized, the proposed rule would have eliminated the public company climate disclosure requirements and marked a significant shift in the SEC’s approach to ESG regulation, particularly with respect to climate-related disclosures.

House Committee Approves Bill Regulating Proxy Advisers, ESG Disclosures

In April, the Protecting Americans’ Retirement Savings From Politics Act was approved by the House Committee on Financial Services. The bill now sits with the House of Representatives for consideration. If enacted, the bill would limit SEC disclosure rules, with the aim of curbing required disclosures tied to political, social, or environmental priorities.

The legislation would also regulate proxy advisory firms by, among other things, requiring conflict disclosures and prohibiting the “practice of automatically voting . . . with the recommendations of a proxy advisory firm or on a proxy advisory firm’s electronic voting platform with the proxy advisory firm’s recommendations . . . without independent review and analysis.” This legislation fits within the broader focus on proxy advisory firms, discussed in more detail below.

DOL UPDATES

ESG investing issues appear front and central to the priorities of the current US Department of Labor, including the following recent developments:

DOL Signals Targeted Enforcement on ESG in 401(k)s, Issues FAB on the Same

Over the last few months, DOL leadership has been signaling concern over retirement plan fiduciaries engaging in ESG-related investing. In a public speech on May 8 Daniel Aronowitz, the head of EBSA (the subagency that enforces ERISA)) emphasized that the agency will prioritize action against “bad faith” actors and “crack down” on firms that “misappropriate assets” in order to “enrich themselves or pursue other purposes collateral to the provision of benefits to the American worker.”

He further specifically stated that this includes “disloyal pursuits of ESG.” His statements could be indicative of a future DOL focus on enforcement that targets ESG investing by ERISA plans or improper consideration of ESG factors by such plans.

The remarks follows agency guidance from April, “Guiding Principles for EBSA Enforcement Priorities,” Field Assistance Bulletin No. 2026-01, that is directed to DOL investigators and highlights a concern with ESG investing. It instructs DOL enforcement staff to prioritize investigations involving breaches of the duty of loyalty. The bulletin also emphasizes that while the DOL will continue to enforce ERISA’s duty of prudence, the agency generally will avoid second-guessing process-based fiduciary judgments and instead focus on cases involving bad faith, conflicts of interest, or other loyalty breaches.

Of particular note, the bulletin specifically calls out as enforcement the agency wants to target “conduct designed to advance goals unrelated to participants’ best interests, such as ESG objectives,” another signal that the DOL may be targeting enforcement of ESG in the future.  

Further, in a speech at a recent OECD event, EBSA senior policy advisor Jack Lund provided insight into how the DOL views what it considers nonfinancial goals for retirement investing. Lund opined that “[o]nce any purpose or goal, other than the exclusive purpose of protecting workers, is allowed to infect decision-making on pension investment, this divestment monstrosity is what awaits you at the bottom of the metaphorical slippery slope.” Lund concludes, “The way to prevent this explosive ending is by prohibiting, altogether, the consideration of factors other than the provision of retirement benefits. That is precisely how our system is designed.”

Read more about the shift in the DOL’s enforcement philosophy in our LawFlashes DOL Signals Significant Shift in ERISA Enforcement Priorities: Key Takeaways from FAB 2026-01 and US Department of Labor ERISA Enforcement Spring 2026 Updates.

DOL’s Updated Proposed ESG Rule Reaches White House

On June 30, it was reported that the DOL’s proposed rule regarding “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” had arrived at the White House’s Office of Information and Regulatory Affairs, signaling the rule is nearing public release.

This rule will replace the Biden-era regulation often referred to as the “ESG Rule,” which has been interpreted to allow ERISA-regulated retirement plans to consider ESG factors under certain circumstances when relevant to a fiduciary’s risk-return analysis. The proposed rule is expected to be a rewrite of prior DOL guidance on the role of ESG factors when evaluating investments for ERISA retirement plans.

While it is unknown what the content of the rule will be, many commentators expect that it will both clarify and further restrict the circumstances under which ESG-related considerations may be taken into account by ERISA fiduciaries when selecting investments and exercising shareholder rights, making it a significant development for retirement plans incorporating ESG considerations into their investment processes. The new ESG draft may revert to the standard used during President Trump’s first term.

Status updates regarding this rule can be tracked on the OIRA site.

DOL Clarifies Fiduciary Status of Proxy Advisors, Reinforces ERISA Standards on Proxy Voting

On April 1, the DOL published a Technical Release providing guidance on the application of ERISA fiduciary rules to proxy advisory firms and proxy voting practices for retirement plans. The release clarifies that proxy advisory firms may be considered ERISA fiduciaries where they exercise discretion over proxy voting or provide investment advice for a fee, with fiduciary status determined based on the facts and circumstances.

The release further emphasizes that proxy voting decisions must be made solely in the economic interest of plan participants and beneficiaries, grounded in risk-return considerations rather than nonfinancial factors. It also addresses ERISA preemption, indicating that certain state laws imposing disclosure requirements on proxy advisory firms may not be preempted where they do not directly regulate ERISA plans. 

For more information, refer to the official release and our LawFlash Proxy Voting Under ERISA: DOL Guidance Signals Greater Oversight—and Risk.

DOL Proposed Rule on Fiduciary Duties for Selecting 401(k) Plan Investment Options Could Impact ESG Offerings

The long-awaited proposed rule from the DOL to implement the August 2025 executive order Democratizing Access to Alternative Assets for 401(k) Investors was published in the March 31 edition of the Federal Register. The DOL proposal was issued together with a News Release and Fact Sheet. The proposed rule, which the order had directed the DOL to issue no later than February 3, 2026, was eagerly anticipated by the retirement industry due to the importance of employer-sponsored 401(k) plans and other participant-directed defined contribution plans (DC plans) covered by ERISA in the retirement landscape.

Notably, the proposed rule is asset neutral, meaning it does not seek to prioritize or favor certain asset types and investments over others. However, it emphasizes that ERISA’s fiduciary duties are grounded in a prudent decision-making process rather than the selection or exclusion of any particular asset class.

Consistent with that approach, the proposal establishes a process-based framework under which fiduciaries are expected to evaluate all designated investment alternatives under the same prudence and loyalty standards, rather than by reference to any preferred or disfavored category of investment.

Notwithstanding this, some commentators have raised questions about whether the rule’s “asset neutrality” could create a path for support for ESG-oriented investment options in private-sector 401(k) plans. On the other hand, the present DOL leadership has not signaled support for ESG investing (see, for example, the ESG enforcement update below). 

Read more about the DOL’s announcement of the rule in DOL Proposes Rule on Fiduciary Duties for Selecting 401(k) Plan Investment Options; details about the proposed rule can be found in Fitting Alternative Assets with ERISA DC Plans: More Takeaways from DOL’s Proposed 401(k) DIA Selection Rule and additional considerations that arise from the Proposed Rule can be found in Beyond Alternative Assets: Takeaways of DOL’s Proposed 401(k) Designated Investment Alternative Selection Rule.

LITIGATION UPDATES

In addition to legislative and regulatory updates, there continues to be litigation activity tied to ESG investing.

New ERISA Fiduciary Breach Lawsuit

In a complaint filed on March 3, a participant in a 401(k) plan of a global commercial real estate firm alleged that plan fiduciaries breached their ERISA duties by selecting and retaining an investment fund that failed to consider or manage climate-related financial risks, resulting in excessive risk, inferior performance, and higher fees for participants.

A core theory of the complaint was that climate change presents financially material risks to investment portfolios, and that these are precisely the types of risks ERISA requires fiduciaries to prudently evaluate and monitor.

This case represents the second recent ERISA lawsuit involving ESG-related theories of fiduciary breach, however, unlike the earlier case the claims here arise from the alleged failure to account for climate risk rather than from the use of ESG-focused investment strategies. Together, these cases highlight how climate and ESG issues are increasingly appearing in ERISA litigation involving defined contribution plan investment menus.

STATE UPDATE

State legislatures and regulators continue to advance both “pro-ESG” and “anti-ESG” investing rules.

State-Level ESG Disclosure Bills Targeting Proxy Advisors and Litigation Challenges

Over the last few months, a number of US states have introduced or passed legislation regulating proxy advisory firms and targeting disclosure requirements, including Indiana H.B. 1273, Kansas S.B. 375, Kentucky S.B. 183, Oklahoma H.B. 4429, and Tennessee H.B. 2476. Pending proxy disclosure rules include North Carolina S.B. 1057 and South Carolina H.B. 4985.

The enacted proxy voting rules can be grouped into three general types:

• Type 1 requires proxy advisory firms to disclose when proxy voting advice or recommendations are (within the meaning of the rules) deemed not solely in the financial interest of the shareholder (including because they are based on nonfinancial considerations or contrary to a board recommendation) and where conflicting recommendations are made to different clients. Texas and Kentucky fall into this category with their proxy rules.
• Type 2 requires proxy advisory firms to provide disclosures when proxy voting advice or recommendations are contrary to recommendations by company management, including where the recommendation is based on a default policy, regardless of whether the recommendation is supported by a written financial analysis. The states with these rules include Indiana, Kansas, and Oklahoma.
• Type 3 requires proxy advisory firms (as well as other fiduciaries) serving Tennessee public investment funds to base voting recommendations and investment decisions on financial factors and imposes certain related reporting and disclosure requirements. Tennessee falls under type 3.

These rules have been subject to litigation challenges, and these lawsuits are at various stages of litigation. As covered in our winter quarterly update, Texas S.B. 2337 was enjoined from enforcement against the challenging parties in a preliminary injunction granted in August 2025. This June, Kansas S.B. 375 and Indiana H.B. 1273 were also enjoined from enforcement against the challenging parties.  

Fifth Circuit Reinstates Texas S.B. 13 Pending Appeal

In February, a federal district court held that Texas’s anti-ESG investing bill, S.B. 13, violated the First and Fourteenth Amendments and issued an injunction preventing the state from enforcing the statute. Defendants filed a motion to stay the injunction pending appeal, but that request was denied in April.

On May 29, however, a three-judge panel of the Fifth Circuit stayed the injunction on Texas’s anti-ESG investing bill while the appeal proceeds. The Fifth Circuit rejected the district court’s First Amendment analysis, concluding that S.B. 13 regulates investment decisions and state spending rather than protected speech.

S.B. 13 required the Texas comptroller to compile and maintain a public list of financial companies that “boycott energy companies” and generally prohibited Texas governmental entities from investing in or contracting with those companies, and companies above certain thresholds must certify that they will not boycott energy companies.

Read the official order.

New York’s Climate Corporate Data Accountability Act Passes Senate

On February 10, S.B. 9072, New York’s proposed climate disclosure rule, passed in the Senate and was delivered to the Assembly Committee.

The bill, titled the “Climate Corporate Data Accountability Act,” would require large business entities doing business in New York with more than $1 billion in annual revenue to annually disclose their Scope 1, 2, and 3 greenhouse gas emissions and is modeled on S.B. 253, California’s climate-related disclosure rule.

Republican AGs Sue Major Proxy Advisory Firm Over Proxy Voting Practices

A large proxy advisory firm is currently being sued by the attorneys general of Iowa, Nebraska, Texas, and West Virginia, alleging that the firm has engaged in deceptive trade practices. The lawsuits claim that the firm’s voting recommendations and ESG-related practices violate consumer protection laws and improperly influence corporate governance decisions.

These cases reflect a broader trend of increased state scrutiny of the role of proxy advisory firms and ESG factors in shareholder voting through both litigation and new legislative measures.

For more information, see the Texas AG’s press release, Nebraska’s, Iowa’s, and West Virginia’s.

Oklahoma Fossil Fuel Boycott Law Found Unconstitutional

On April 7, the Oklahoma Supreme Court ruled that the Oklahoma Supreme Energy Discrimination Elimination Act is “unconstitutional in its entirety when applied to the Oklahoma Public Employees Retirement System.” The law, which went into effect in November 2022, required the Treasurer’s Office to compile and maintain a list of financial companies that boycott energy companies. It also directed state entities to divest from them.

The Oklahoma Public Employees Association argued the law was unconstitutional as it required state pension systems to cut ties with fund managers, which inherently cost retirees seeing as more than 60% of the system’s assets were controlled by “blacklisted” companies. The decision upheld a district court decision, which also struck down the law in 2024.

The court ruled that the Oklahoma Public Employees Retirement System is constitutionally required to fulfill its duties “solely in the interest of the participants and beneficiaries” and that this law interfered with the pension plan’s purpose.

California Finalizes Initial Climate Disclosure Rules But Delays Reporting Deadline

On February 26, the California Air Resources Board approved its first set of regulations implementing the Climate Corporate Data Accountability Act (S.B. 253) and Climate-Related Financial Risk Act (S.B. 261), clarifying which companies must report emissions and climate-related financial risks.

The initial regulations for S.B. 253 established key definitions, fee structures, and set an initial reporting deadline for August 10, 2026, with disclosures limited to Scope 1 and Scope 2 emissions (as covered in our LawFlash California Air Resources Board Approves Initial Regulations for Climate Disclosure Laws).

However, CARB released a notice on June 24 that defers the reporting deadline under S.B. 253 to November 10, 2026. The purpose of the deferral is to enable CARB to make “limited changes” (to be announced) to the prior proposed regulations and permit regulated entities sufficient time to comment on, and ultimately comply with, those changes.

CLIMATE INITIATIVES

In addition to these regulatory and litigation updates, there have been meaningful developments with respect to certain climate initiatives.    

NZAM Announces Relaunch and Unveils Updated Commitment Statement

In February, the Net Zero Asset Managers initiative announced its relaunch, with more than 250 asset managers signed on to the updated commitment statement. The revised commitment statement retains its core focus (including continued alignment with the Paris Agreement’s 1.5⁰C goal) but relaxes its requirements for signatories.

The number of individual requirements has been reduced, and the prior timeline that required action by 2050 has been removed from the core commitment. The updated commitment also characterizes climate change considerations as financial in nature and part of fiduciary duties, which appears to provide a limiting carveout to reflect diverse jurisdictional realities.

For more information, see NZAM’s statement regarding the relaunch and the updated commitment statement.

HOW WE CAN HELP

Morgan Lewis 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 LawFlash.