The Trump administration is moving to drop the Biden-era environmental, social, and governance (ESG) retirement investment rule and is considering replacing it.
The administration has ceased its legal defense of the rule allowing fiduciaries to consider ESG factors when choosing retirement investments, according to a legal filing with the 5th Circuit Court of Appeals. The U.S. Department of Labor (DOL) is being asked to replace it with a new regulation.
“The Department has determined that it will engage in a new rulemaking on the subject of the challenged rule,” according to a letter written by a lawyer with the U.S. Department of Justice’s civil division appellate staff. The new rulemaking process will be included in the Trump administration’s next spring regulatory agenda, according to the letter.
The ESG rule has been in effect since early 2023. It was finalized in 2022 following an executive order signed by former President Joe Biden in May 2021 that directed federal agencies to consider policies to protect against the threats of climate-related financial risk.
The ESG rule, titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” permits retirement plan fiduciaries, such as 401(k) plan sponsors, to consider climate change and other ESG factors when they select investment options and exercise shareholder rights, including proxy voting for plan-held securities. The DOL at the time emphasized that while the rule allows fiduciaries to consider these factors, it does not mandate doing so.
The rule has been subject to significant debate, with opponents arguing that it will hurt retirement savings. Twenty-six Republican-led states — led by Texas Attorney General Ken Paxton and then-Utah Attorney General Sean Reyes — sued the Biden administration over the rule, with Paxton saying it “prioritizes woke Environmental, Social and Governance investing over protecting the retirement savings of approximately two-thirds of the U.S. population.” The Senate voted to repeal the rule in March 2023, but Biden vetoed the motion.
A federal district court judge has since ruled that the rule was permissible.
Supporters of the rule say it is helpful to all parties because it enables fiduciaries to use their best judgment when making investment decisions by allowing them to consider all relevant financial factors, including ESG.
Further clarity regarding the rule is expected in the administration’s next spring regulatory agenda.
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