Fall 2025 ESG Investing Quarterly Update

From sweeping state laws restricting ESG-related investment practices and disclosure mandates to efforts by the US administration to dismantle prior federal guidance, the ESG investing landscape is rapidly evolving in both substance and focus. For asset managers, fiduciaries, and companies, this wave of scrutiny from state legislatures, federal regulators, and litigators raises complex compliance questions and legal risks.

This update summarizes key ESG investing–related legislative and regulatory activity from the past quarter, with a particular focus on state proxy voting and disclosure laws, federal agency enforcement trends, and congressional efforts to restrict ESG considerations in retirement plans.

FEDERAL UPDATE

ESG investing continues to be a focus of federal activities by the White House, the US Congress, and federal regulators.

US Department of Labor: Administration Moves to Dismantle Biden-Era DOL ESG Rule

After prolonged legal proceedings that we summarize in this Insight, the current administration announced on May 28 that it will take regulatory action to overturn “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” the Biden-era rule allowing ERISA-regulated retirement plans to consider ESG factors. The rule permitted ESG considerations under certain circumstances and had been interpreted to support certain types of ESG investing with ERISA-regulated assets. You can read our analysis of this announcement on the ML BeneBits blog.

In the latest DOL regulatory agenda on September 4, the agency formally committed to replacing the rule. The new rule is identified in the regulatory agenda as expected to be finalized by May 2026.

Refer to the regulatory agenda for more information as well as the status of the new rule.

US Department of Justice and Federal Trade Commission: ESG-Related Antitrust Concerns

On May 22, the DOJ and FTC filed a joint statement of interest in a Texas lawsuit against large asset managers, supporting the state’s antitrust claims. Texas alleges large asset managers used their influence over coal companies to reduce production for ESG reasons, ultimately harming competition. The agencies endorse a low threshold for antitrust liability and warned they would pursue firms that use ESG commitments to distort markets.

Further, in response to major firms announcing their departure from various ESG coalitions, congressional Democrats sent a letter to major financial institutions urging them to recommit to global climate coalitions such as the Net Zero Banking Alliance. The letter warns that withdrawing from these climate efforts increases systemic financial risk and signals that Democratic leaders may increase political pressure on firms that are disregarding ESG commitments.

Securities and Exchange Commission: SEC Withdraws ESG Disclosure Proposal for Asset Managers

On June 12, the SEC formally withdrew its proposed rule on ESG disclosures for investment advisers and funds. The rule would have required detailed reporting on ESG investment practices. While this withdrawal does not restrict ESG investing, it does signal a broader regulatory pullback under the current administration.

US House of Representatives: Draft Legislation to Limit ESG in ERISA-Regulated Plans

Private US retirement plans governed by the Employee Retirement Income Security Act (ERISA) continue to face battles regarding ESG investing. Recently, the House Committee on Education and Workforce approved H.R. 2988 aimed at limiting ESG considerations in retirement plans governed by ERISA. This is part of broader efforts by House Republicans to limit ESG’s role in fiduciary decision-making.

No Damages Awarded in ESG ERISA Trial

Earlier this year, a federal judge ruled in a case involving an ERISA plan that the plan’s fiduciaries had breached their fiduciary duty of loyalty under ERISA by allowing ESG considerations to influence investment decisions, particularly related to the proxy voting activities.

Despite being found liable, the court found no evidence of monetary loss to the plan. While the fiduciaries will not owe financial damages, the court did order a number of remedial equitable measures, among them:

• No proxy voting or stewardship activities that are “motivated by or directed towards non-pecuniary ends, including . . . ESG-oriented investment management and objectives, that are not in the exclusive best financial interest of [the] Plan.”
• Plan required to have “two independent members” of the plan committee with no “connection or relationship, financial or otherwise” with any administrator, advisor, and/or investment manager of plan assets.
• Annual written report must be provided identifying “financial transactions and/or financial relationships” between the plan and each administrator, advisor, and/or investment manager.
• Annual certification to plan participants that the committee, and each administrator, advisor, and manager of plan assets, will only pursue investment objectives and engage in proxy voting based on “provable financial performance,” “not DEI, ESG, sustainability, or any other nonfinancial criteria.”
• Publish on website information concerning membership of plan sponsor and each administrator, advisor, and manager in UN PRI, NZAMI, Ceres Investor Network, and similar.
• Enjoins plan use of asset manager that has a “significant” ownership of plan sponsor (3% or more of plan sponsor shares) or holds any plan sponsor fixed debt to manage plan assets without “policies preventing those who maintain the corporate relationship” with the manager from also being fiduciaries or playing a role in managing the plan.

This ruling marks a significant development in the legal scrutiny of ESG investing, especially with respect to ERISA plans.

STATE UPDATE

States legislators continue to add rules that regulate ESG investing (both “pro”–ESG investing rules and “anti”–ESG investing rules) and state regulators continue to take actions that scrutinize ESG investing.

Dueling Letters Sent by Democratic and Republican State Regulators to Prominent Asset Managers

On July 29, a group of state treasurers and financial officers from 21 states sent a series of letters to the CEOs of several major investment firms, warning the firms against embedding ESG considerations in their investment strategies, engagement, and proxy activities.

The officials requested that the firms “reaffirm and operationalize their commitment to traditional fiduciary duty,” a message consistent with prior efforts of Republican lawmakers to eliminate initiatives related to sustainable investing. The letter prompted firms for a response by September 1, 2025.

Nearly one month after this letter from Republican regulators, 17 Democratic officials sent their own letter, urging the recipient firms to reaffirm their “current commitment to responsible stewardship” when making investment decisions, also asking for a response by September 1.

A prominent asset manager published a public response to both Republican and Democratic officials on August 27, stating that “these letters continue a concerning trend by both parties of politicizing the management of public pension funds” and that “the politicization of pension fund management ultimately costs savers and retirees.”

In its letter, the asset manager emphasized its “fiduciary first mindset” and noted that “fiduciary standards set by federal and state law also require [it] to prudently and loyally adhere to our clients’ investment guidelines and objectives, including those specified by the pension funds in your states.”

Texas S.B. 2337 Temporarily Enjoined

On June 20, the Texas governor signed S.B. 2337 into law, marking a significant development in the increasing scrutiny of proxy voting as a focus of regulators targeting ESG investing, including by institutional investors like public and private retirement plans. The law was to impose two new disclosure obligations on proxy advisors with respect to their services to companies formed or headquartered in Texas and their shareholders.

The Texas legislature described it as designed to increase transparency around the influence of nonfinancial factors—particularly ESG considerations—on proxy voting recommendations.

S.B. 2337, which was scheduled to go into effect on September 1, was temporarily enjoined from being enforced against two prominent proxy advisory firms by the judge hearing both Glass Lewis v. Paxton (W.D. Tex) and Institutional Shareholder Services Inc. v. Paxton (W.D. Tex.). The injunction is in effect until a trial, currently scheduled for February 2, 2026.

The injunction came one week after the Texas Stock Exchange filed a motion to intervene in the proxy-adviser lawsuits against Texas. The Texas Stock Exchange argues in its motion that, “[f]or too long, proxy advisors have provided—without disclosure—advice and recommendations based not on financial factors that increase value, but rather on ideological agendas across the spectrum. Proxy advisors have even recommended that investors vote against businesses relocating to Texas’s business-friendly environment, even though such moves are often in the business’s financial best interest.”

On September 18, Attorney General of Texas Ken Paxton filed a notice of appeal in cases against both ISS and Glass Lewis, appealing the district court’s grant of the preliminary injunction regarding the implementation of S.B. 2337.

Attorney General Paxton concurrently launched an investigation into ISS and Glass Lewis, claiming that both firms misled public companies and institutional investors by issuing proxy voting recommendations that push nonpecuniary factors such as ESG. He has issued civil investigative demands to both firms to determine if they have violated Texas consumer protection laws, including those prohibiting nondisclosures of material facts.

Texas Judge Denies Motion to Dismiss in ESG-Related Antitrust Lawsuit

A federal court in Texas recently allowed a lawsuit by Texas and 10 other states to move forward (our coverage found here), accusing several large asset managers of working together to reduce coal production through their involvement in climate-focused investment groups. The judge found the states had provided enough evidence to claim that these actions may have hurt competition, which could violate antitrust laws.

The court clarified that simply voting on company issues is usually allowed, but taking steps that discourage competition between companies might not be. This case raises new legal questions for investment groups that support environmental goals, especially those involved in coordinated climate initiatives.

State Probes Related to ESG Investigating

Florida Attorney General James Uthmeier announced his office is investigating whether the CDP (formerly the Climate Disclosure Project) and Science Based Targets Initiative (SBTi) violated state consumer protection or antitrust laws by coercing companies into disclosing proprietary data and paying for access under the guise of environmental transparency.

According to the announcement, the investigation will explore potential antitrust violations, including whether coordination between CDP, financial institutions, and investment services constitutes unlawful market manipulation and whether CDP’s efforts result in anticompetitive effects.

Two prominent proxy advisory firms continue to face regulatory probes related to ESG investigating. In July, Missouri’s attorney general announced his office is investigating the two largest US proxy advisory firms, alleging they have advanced “radical ESG and DEI priorities that violate fiduciary duties of companies and have created a duopoly in the U.S. proxy advisory market.”

New State-Level ESG Investing Rules

North Carolina

In June, North Carolina passed H506, the 2025 State Investment Modernization Act, extending an ESG consideration prohibition to prohibit assets overseen by the North Carolina Investment Authority. This builds on the state’s H.B. 750, which applied similar limits to funds managed by the State Treasurer and all political subdivisions.

Oregon

Also in June, Oregon passed H.B. 2081 requiring the Oregon Investment Council and State Treasurer to manage climate-related risks for the state’s public pension fund. The law mandates reporting on Scope 1 and Scope 2 emissions for fossil fuel investments and prioritizes investments that reduce net greenhouse gas emissions.

State-Level Climate Disclosure Rules

California

As covered in a previous update, California passed SB 261 and SB 263 in October 2023, both requiring certain ESG-related reporting requirements for companies. While these statutes were enacted in 2023, the regulatory process remains ongoing and behind schedule. On May 29, the California Air Resources Board (CARB) held a virtual town hall to discuss their progress on drafting regulations and reporting standards for these climate-related disclosure rules.

The board revealed that they are still in the informal pre-rulemaking stage—including as to the standards that will be used to determine the reporting requirements—and were ultimately unable to meet the July 1 deadline to draft the rules and processes. CARB is expected to begin the formal rulemaking process by fall, with a target of final approval for SB 253 and SB 261 by late 2025. However, even with this delay, the California senators who sponsored the legislation stated at the hearing that the 2026 effective date of the reporting requirements will not be moved.

In July, CARB published an FAQ document detailing its progress on drafting regulations and reporting standards for SB 261 and SB 263. CARB reiterated that the board is “committed to developing a regulation by the end of the year” and the guidance in these FAQs is intended to assist companies with their initial planning surrounding these climate disclosure rules, particularly for submitting climate-related financial risk reports by January 1, 2026. Learn more about the recent SB 261 and SB 263 CARB guidance in our September 17 LawFlash.

On August 21, CARB held another virtual public workshop to provide updates on the implementation of the state’s corporate climate disclosure laws, SB 253 and SB 261. While the deadline for submitting climate risk reports under SB 261 remains January 1, 2026, CARB is now proposing a June 30, 2026 initial reporting deadline for SB 253 Scope 1 and 2 data (for fiscal year 2025).

Based on public comments, CARB is considering altering the meaning of “doing business in California” to establish an actionable regulatory definition under which companies will have to be subject to the disclosure laws. CARB is exploring the concept of using a public database from the California Secretary of State that determines companies that are “domiciled” or have an “agent of service” within the state and are considered “active.”

Using this new definition, CARB now estimates approximately 4,200 entities will be subject to SB 261 disclosures ($500M revenue threshold) and approximately 2,500 entities will be subject to SB 253 disclosures ($1B revenue threshold). This is a significantly lower valuation than the 10,000 companies CARB had previously estimated as subject to the disclosure laws.

Texas

Texas recently introduced H.B. 4049, which would prohibit companies from spending resources to track or measure direct or indirect greenhouse gas emissions. While not directly regulating ESG investing, this bill reflects a growing trend among states to limit climate-related disclosure mandates.

Texas also recently issued its list of “Financial Companies That Boycott Energy Companies,” adding new managers and funds. The boycott list is pursuant to Texas S.B. 13, which requires state entities, including state pension funds, to consider divestment from companies that Texas officials deem antagonistic to the fossil fuel industry. Companies on the list are barred from doing business with the Texas state government. The list can be found on the Texas Comptroller website.

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

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 expertise 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.