Navigating ESG in Retirement Plan Investments: Fiduciary Best Practices Amid Regulatory Shifts

Emily Costin

Fiduciaries’ consideration of environmental, social and governance factors in retirement plan investments continues to be a hot-button issue in regulatory and political debates. In May, the Department of Labor under President Donald Trump announced it would cease defending its 2022 ESG Rule in court and initiate new rulemaking, signaling a potential return to a more restrictive view of ESG investing. As fiduciaries await further regulatory clarity, they must navigate a complex landscape shaped by evolving legal standards, political shifts and growing stakeholder expectations.

A Brief Timeline: ESG Regulatory Whiplash

ESG factors may include environmental considerations such as climate risk, water usage and pollution controls; social factors like labor practices and supply chain ethics; and governance issues such as board independence, executive compensation and shareholder rights.

The regulatory treatment of ESG investing has swung dramatically over the past decade:

2015–2016 (Obama Administration). The DOL issued an interpretive bulletin clarifying that ESG factors could be considered as part of a fiduciary’s risk-return analysis.

2020 (Trump Administration). The DOL issued a final rule discouraging ESG considerations, emphasizing that fiduciaries must focus solely on pecuniary (financial) factors.

2022 (Biden Administration). The DOL reversed course, issuing a final rule that allowed ESG factors to be considered when they are relevant to risk and return, and even as a tiebreaker between competing investments.

2025 (Trump Administration). The DOL withdrew its defense of the 2022 rule in Utah v. Chavez-DeRemer and announced plans for new rulemaking that will appear on the DOL’s spring regulatory agenda.

In Chavez-DeRemer, 26 states and other plaintiffs challenged the 2022 rule (the original named defendant was former Secretary of Labor Marty Walsh; Chavez-DeRemer, a Trump appointee, later oversaw the DOL’s decision to withdraw its defense). The district court initially upheld the rule, relying on Chevron deference, which allowed federal agencies to interpret ambiguous statutes. However, after the Supreme Court overturned Chevron in Loper Bright Enterprises v. Raimondo, holding that courts are no longer required to defer to agency interpretations, the U.S. 5th Circuit Court of Appeals vacated the district court’s decision and remanded the case for the limited purpose of determining whether the 2022 rule violated ERISA under the new Loper Bright standard. On remand, the district court again upheld the rule, this time without relying on Chevron deference. The plaintiffs appealed, and the 5th Circuit granted the DOL’s motion to hold the appeal in abeyance for 30 days. On the final day of the stay, the DOL abandoned its defense of the 2022 rule.

This tug-of-war in the regulatory and litigation landscape has left fiduciaries in a state of uncertainty about how to balance ESG considerations with their core fiduciary duties. The duties of loyalty and prudence are not inherently incompatible with ESG investing. In fact, ESG factors can be material to an investment’s risk-return profile. However, the challenge lies in demonstrating that ESG considerations are used to enhance participant interests, not to advance unrelated social or political agendas.

Fiduciary Best Practices in Uncertain Times

Despite the current regulatory fluctuation, fiduciaries may continue to consider ESG factors in retirement plan investments, consistent with ERISA’s fiduciary duties of loyalty and prudence. Incorporating consideration of ESG factors to align with plan participants’ values can lead to greater participation and engagement.

1. Evaluate ESG investment options rigorously.

Under current guidance, fiduciaries may consider incorporating ESG factors into investment decisions. However, fiduciaries should apply the same level of scrutiny and due diligence to ESG-themed investment options as they would with any other investment in the fund. Such ESG-related elements should be evaluated as part of a comprehensive risk-return analysis, ensuring they support the financial objectives of the plan’s participants, rather than serving as independent or noneconomic goals. This includes confirming that the fund’s strategy is consistent with its stated objectives, comparing its performance and fees against non-ESG alternatives, and continuously monitoring the fund’s performance and adherence to its investment mandate. The investment strategy should align with the goals set forth in the investment policy statement. ESG funds should not be designated as default options unless they meet the same fiduciary standards as traditional investment options, especially in terms of risk, return and cost.

2. Document the decisionmaking process consistently and thoroughly.

As with any investment decision, fiduciaries should keep records of all investment decisions, including how ESG factors were evaluated for the plan and why they are selected or maintained. Proper documentation not only supports the rationale behind investment choices, but also helps demonstrate how fiduciaries are acting in the best interests of plan participants with their decisions.

3. Develop clear proxy voting policies.

The 2022 rule also addressed fiduciaries’ responsibilities in exercising shareholder rights, particularly as they pertain to proxy voting. Although the future of this guidance remains uncertain, fiduciaries should take proactive steps to ensure compliance with ERISA’s standards by developing clear and well-documented proxy voting policies, making sure that all votes are cast solely in the financial interest of plan participants and maintaining oversight when delegating voting authority to third parties. The increasing significance of proxy voting was highlighted in Spence v. American Airlines, in which the court noted that ESG investing has transformed proxy voting from a typically immaterial issue into a material consideration for fiduciaries evaluating a plan’s current or expected performance.

A Look Ahead: What Future Rulemaking May Bring

The current DOL will likely have a more restrictive view of ESG investing. While the specifics of a new rule are yet to be determined, several possibilities are on the horizon:

• Reinstatement of the “pecuniary-only” standard: The DOL may return to the 2020 rule’s emphasis on pecuniary factors, requiring fiduciaries to justify ESG considerations strictly in financial terms;
• Increased burden of proof: Future rules may shift the burden to fiduciaries to prove that ESG factors are financially material, potentially inviting more litigation;
• Limits on ESG as a tiebreaker: The 2022 rule allowed ESG to be used as a “tiebreaker” between equivalent investments. This provision may be eliminated or narrowed; and
• Proxy voting clarification: New guidance may restrict fiduciaries’ ability to vote proxies based on ESG considerations, requiring a more explicit financial rationale.

Conclusion

While the regulatory pendulum continues to swing, fiduciaries should focus on upholding the ERISA duties of prudence and loyalty by taking the following practical steps:

• Stay informed: Monitor for updates on rulemaking;
• Review plan policies: Update investment policy statements to reflect current standards;
• Engage experts: Consult legal and investment advisers on ESG integration;
• Educate committees: Ensure fiduciary committees understand their duties and the evolving landscape; and
• Communicate With Participants: Be transparent about how investment decisions are made and the role of ESG factors.

Fiduciaries should be certain that all investment decisions, including ESG-related factors, remain grounded in financial merit and are aligned with participants’ best interests.

Emily Costin, a nationally recognized leader in ERISA litigation at Alston & Bird, co-leads the firm’s compensation, benefits and ERISA litigation group. Bria Smith is a former associate with the firm.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.