The US Department of Labor’s (DOL’s) position on the appropriateness of environmental, social, and governance (ESG) investing strategies in ERISA-regulated retirement plans has ping-ponged for decades (as we’ve covered previously). A recent statement from Trump administration attorneys in a lawsuit challenging a Biden-era regulation on the topic indicates that the ball is likely sailing back to the other side of the table and specifically to a posture that is largely skeptical that ESG investment factors can comply with ERISA’s fiduciary duties.
Notably, the DOL’s evaluations of ESG, as well as those of certain courts and other regulators that have found fault with ESG investment considerations, have not been limited to so-called “ESG funds” but instead extended to the role of individual ESG investment factors (such as governance factors) applied to non-ESG funds and in the proxy voting process.
Trump administration attorneys recently announced to the Fifth Circuit Court of Appeals that the DOL is planning to issue a new rule to replace the Biden-era regulation “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (the ESG Rule), which has been interpreted as viewing certain types of ESG strategies and/or individual factors as capable of satisfying ERISA’s fiduciary duties. This announcement came via a letter to the Fifth Circuit, which is hearing a challenge to the ESG Rule in Utah v. Walsh.
This development was not surprising: the administration has signaled its criticism of the appropriateness (under ERISA’s fiduciary standard) of considering ESG factors. It also comes within the context of a larger attack on ESG investing by retirement plans.
Plan sponsors and fiduciaries may benefit from closely following this development as it could foreshadow DOL activity targeting perceived improper consideration of ESG factors in retirement plans, such as a return to the ESG investigations that the DOL undertook during the first Trump administration.
Background
In 2020, during the first Trump administration, the DOL issued a rule on ERISA plan consideration of ESG, “Financial Factors in Selecting Plan Investments” (the 2020 Rule). The 2020 Rule was skeptical of ESG and required fiduciaries to consider only “pecuniary” (interpreted to mean “financial” or possibly “non-ESG”) factors.
The 2020 Rule was reversed under the Biden administration when the DOL published the final version of the ESG Rule in November 2022. The ESG Rule asserted the DOL’s position that fiduciaries managing ERISA-regulated retirement plans may consider ESG factors when making investment decisions. While this rule does not mandate the inclusion of ESG factors, it allows them as permissible considerations under certain circumstances.
History of the Case in the Fifth Circuit
In Utah v. Walsh, the attorneys general of 26 states sued the DOL in federal district court in Texas to invalidate the ESG Rule, alleging that it violated ERISA’s requirement that fiduciaries act solely in the financial interest of plan participants and was arbitrary and capricious under the Administrative Procedures Act (APA). The ESG Rule survived these legal challenges when the district court held that issuing the ESG Rule fell within the DOL’s authority and was neither arbitrary nor capricious.
The plaintiffs appealed the decision to the Court of Appeals for the Fifth Circuit. In that appeal, oral arguments were heard mere days after the US Supreme Court’s landmark decision in Loper Bright Enterprises v. Raimondo, which limited judicial deference to agency interpretations of statutes. The Fifth Circuit remanded the case to the federal district court for reconsideration in light of Loper Bright.
On February 14, 2025, the federal district court issued an opinion once again upholding the ESG Rule, concluding that Loper Bright requires courts to interpret statutes and courts may not defer to agency interpretations of a statute, but it did not cause this regulation to be invalid.
The survival of the ESG Rule was short-lived. In April 2025, the Trump administration attorneys representing the DOL in Utah v. Walsh informed the Fifth Circuit that the DOL was considering rescinding the same ESG Rule they were tasked with defending. In response, the Fifth Circuit granted a 30-day pause, directing the DOL to provide an update on what further actions it planned to take.
The government attorneys responded to this request with their May 28 letter, indicating that the DOL expects to file a new ESG investing regulation in the near future and “move through the rulemaking process as expeditiously as possible.”
Next Steps
We anticipate that for the DOL to issue a new rule it will need to follow a notice-and-comment rulemaking process as outlined in the APA. The DOL will publish a notice of proposed rulemaking in the Federal Register, provide the public an opportunity to participate in the rulemaking through submission of written comments, and finally consider all comments if they are to develop the final rule.
We currently anticipate that the upcoming iteration of this ESG regulation will at least revert more closely to the 2020 Rule than the ESG Rule. (See our analyses of the ESG Rule and 2020 Rule.) It may also be the case that the DOL will take a more aggressive posture or focus more heavily on other aspects of ESG investing, such as proxy voting, given the growing intensity of challenges to ESG investing over the last few years and the increasing focus on the role of proxy voting in ESG (as we have previously covered).
Importantly, this focus has not been limited to so-called “ESG funds” and instead some regulators and courts have found fault with non-ESG specific strategies for improper consideration of underlying ESG factors.
How We Can Help
The appropriate role of ESG factors in ERISA plan investing continues to evolve under intense legal and political scrutiny. In this rapidly changing legal landscape, staying informed of legal developments and enforcement trends is critical to mitigating potential liabilities.
We stand ready to assist in navigating this ESG landscape. If you require assistance, please reach out to one of the authors or your primary Morgan Lewis contact.
Legal practice assistants Brian Harbaugh and Mia Deck contributed to this BeneBits post.