The U.S. Department of Labor (DOL) announced that it will be issuing a new rule to govern how environmental, social, and governance (ESG) factors are used in retirement plans covered by the Employee Retirement Income Security Act of 1974 (ERISA). The update appears in the DOL’s semi-annual regulatory agenda under the Final Rule Stage, indicating that the rule is likely to be published soon.

This announcement signals yet another shift in the federal government's approach to ESG investing in employee benefit plans. The debate over whether retirement plan fiduciaries should or should not consider ESG factors has become a political flashpoint in recent years, leading to legal challenges and reversals between administrations.

Political Shifts Drive ESG Policy Changes

The DOL’s position on ESG investing has changed significantly depending on which administration is in power. During the Trump administration in 2020, the DOL implemented the "Financial Factors in Selecting Plan Investments" rule. This regulation placed strict limitations on fiduciaries, effectively prohibiting them from considering ESG factors unless they were directly tied to financial returns.

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The Biden administration rolled back this approach. In its place, it introduced the "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights" rule. This more flexible guidance allowed fiduciaries to incorporate ESG considerations as long as those factors were part of a prudent investment process and did not compromise the financial interests of plan participants.

However, in May 2025, the second Trump administration reversed course again. It announced that it would no longer defend the Biden-era ESG rule in court. The move came amid an ongoing legal case in the Fifth U.S. Circuit Court of Appeals, where opponents of ESG integration had challenged the legality of the Biden rule. Legal experts anticipate that the new Trump administration rule will undergo the full notice-and-comment rulemaking process, despite its current classification as being in the Final Rule Stage.

Understanding ERISA and Its Fiduciary Requirements

The debate over ESG investing in retirement plans centers on how fiduciaries interpret their responsibilities under ERISA. Title I of ERISA sets the rules for private-sector retirement and benefit plans, with a primary focus on protecting participants by ensuring prudent and loyal management of their retirement savings.

The DOL has long maintained that fiduciaries must prioritise financial returns and material risk factors in their decision-making. This principle was codified in Interpretive Bulletin 94-1, issued in 1994. Over the next two decades, the DOL released additional guidance reaffirming this position. These documents did not explicitly ban ESG considerations, but they made it clear that any such factors must be grounded in financial relevance.

What makes the current moment unique is that ESG investing has evolved from a niche practice into a widely debated and politically polarising issue. While some argue that ESG factors can help identify long-term financial risks and opportunities, others claim that the integration of non-financial values into investment decisions can compromise returns or reflect political agendas.

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What Comes Next?

The DOL’s announcement raises key questions for plan sponsors, investment managers, and legal teams overseeing retirement plans. If a new rule is issued, it may once again redefine the scope of what fiduciaries are permitted or required to consider when managing ERISA-covered investments.

As of now, no official rule text has been released, and the regulatory process will likely involve significant public input. However, the implications are already clear. Retirement plan fiduciaries will need to monitor the upcoming changes closely, reassess their ESG-related policies, and prepare for potential shifts in compliance requirements.

Given the politically charged nature of ESG investing, this area of regulation is expected to remain in flux. Stakeholders will need to stay informed, especially as the new administration pushes forward its vision for how retirement assets should be managed in light of financial, environmental, and societal priorities.

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