ESG Investing: The US Regulatory Perspective

March 12, 2024

As companies increasingly encounter dialogue regarding environmental, social, and governance (ESG) factors, they and their investors and other stakeholders face the task of navigating the sometimes-contradictory web of regulations governing the world of ESG investing.

In the United States, ESG-related regulatory risk primarily originates from three key sources: the US Securities and Exchange Commission (SEC), the US Department of Labor (DOL), and state legislatures and agencies. This article provides a summary discussion of the regulatory framework impacting ESG investing in these three areas.

SEC Examinations and Enforcement

In recent years, ESG has evolved into an area of focus for the SEC because of investor demand for investment products and strategies that further investors’ ESG goals. As a result, even tangential, ESG-related disclosures made by firms to investors and clients can be deemed “material” in the SEC’s view.

One of the SEC’s main concerns is that asset managers might overstate the scope and materiality of their ESG considerations, practices, or strategies, resulting in portfolios and/or practices that are misaligned with disclosures to investors and clients. Therefore, the SEC is scrutinizing firms’ internal policies, procedures, and investment practices in light of the firms’ outward-facing disclosures.

The SEC looks not only at disclosures in required filings but also at disclosures in marketing materials, on websites, and in investor-facing documents or client presentations to identify potential misstatements or misrepresentations. This approach is not inconsistent with the SEC’s practices in other contexts. The SEC has been doing analogous work for a long time, following principles of fiduciary duty and disclosure.

Late last year, the SEC imposed a $19 million penalty on an investment adviser that the SEC said made materially misleading statements about its controls for incorporating ESG factors into research and investment recommendations for ESG integrated products, including certain actively managed mutual funds and separately managed accounts. Also, the SEC alleged that the adviser marketed itself as a leader in ESG that adhered to specific policies for integrating ESG considerations into its investments. However, for several years, the adviser failed to implement certain provisions of its policy.

Another recent SEC enforcement case involved an investment adviser’s policy and procedural failures regarding two mutual funds and one separately managed account strategy marketed as ESG investments. The SEC alleged that the adviser failed to implement and consistently follow reasonable policies and protocols for ESG research with respect to its product. The SEC imposed a $4 million penalty on the adviser.

The foregoing illustrate that investment advisers and sub-advisers should anticipate that any ESG-related statements and claims will be examined and so must be in a position to substantiate such statements and claims, including those related to the use of third party service providers. This means that all teams, departments, and lines of business within an organization must be informed and on the same page—from investment management to marketing to compliance and legal. In addition, internal policies and procedures and investor-facing statements and documents must be aligned, consistent, and verifiable. Finally, practices, statements, and policies in this area should be constantly reassessed in light of changes to the business and practices.

ERISA and the DOL

As overseer of the Employee Retirement Income Security Act (ERISA), the DOL attempts to regulate fiduciaries with respect to how ESG is or is not permitted in investment decision-making for private retirement plans. The DOL has been considering this issue for more than 20 years, but its actions accelerated in 2020. In 2020, the DOL introduced a rule viewed by many as “anti-ESG.”

This 2020 rule was followed by additional rulemaking at the DOL and accelerating activity by state legislatures and the US Congress to regulate ESG investing. In essence, the 2020 DOL ESG rule was a harbinger of the broader ESG investing debate that has exploded in recent years.

ERISA regulates investment decision-making by private retirement plans. Its rules apply directly to ERISA fiduciaries, as well as certain service providers to those plans, such as investment consultants to those plans and certain asset managers of products into which the retirement plans invest. As a result, the DOL’s ESG rulemaking can impact broad swaths of the financial services industry.

In its ESG-related rulemaking and guidance, the DOL has deemed pivotal the question of whether ESG factors are considered from an economic perspective or in an effort to advance a social goal. In its 2020 ESG rule, the DOL discounted the consideration of ESG factors by fiduciaries as being economically relevant.

However, under the Biden administration, the DOL reversed course and deemed ESG a permissible factor for consideration if undertaken in the context of a risk/return analysis. Pending litigation is currently challenging this rule, including a 2023 lawsuit against one of the largest US airlines. We note that related legislation has been introduced by Republicans in Congress to prohibit any ESG considerations by US private retirement plans.

The States

Since March 2021, 41 states have either proposed or enacted ESG-investing laws. Eight states have enacted “pro-ESG” laws that essentially say that ESG factors should—or must—be considered or that disincentivize investment in a particular controversial industry or sector (e.g., the fossil fuels industry).

Conversely, 20 states have enacted “anti-ESG” laws that seek to disincentivize ESG investing with state assets and prohibit ESG considerations for reasons other than ordinary business or financial purposes. In practice, the biggest potential pitfalls for asset managers and their investors seem to lie within these anti-ESG regimes.

Some anti-ESG bills require that investment decision-making should focus solely on maximizing investment return. Many of these laws also include a provision addressing proxy voting practices, requiring third parties to turn their focus solely on financial pecuniary factors when considering how to vote. Other anti-ESG bills outright prohibit public entities or businesses operating in the relevant state from discriminating against individuals or other companies based on ESG factors. Still other bills place on a blacklist or prohibit state government entities from entering into contracts with companies and financial services firms deemed to be “boycotting” a particular industry (e.g., the fossil fuels industry).

Despite the varied state legislative landscape, it seems that a firm that makes clear that its investment decisions are made first and foremost by considering pecuniary or financial factors relating to the relevant investment may be able to sidestep most anti-ESG minefields, even if it makes ESG-related investments. A firm should make sure to document its investment intent by making express statements and disclosures about such intent.


The regulatory risks attendant to ESG investing is an ever-evolving landscape, and the regulatory framework under the SEC, the DOL, and the states continues to evolve. As companies and other stakeholders navigate the regulations governing the world of ESG investing, they should continue to monitor SEC, DOL, and state-level developments and work with counsel to avoid risks.

If you have any questions or would like more information on the issues discussed in this Insight, please contact any of the authors or your Morgan Lewis contact.