A second Trump administration expected to usher in big changes for ESG at DOL, SEC

A second Trump administration would likely result in major changes at the Labor Department and Securities and Exchange Commission when it comes to ESG-related regulations, industry sources said.

“Historically, regulations have been less susceptible to change from administration to administration,” said Joshua A. Lichtenstein, a partner at the law firm Ropes & Gray and head of its ERISA fiduciary practice.

However, given the GOP has targeted environmental, social and governance investing at both the state and federal level, sources agreed it’s unlikely that a Republican-controlled DOL or SEC would maintain the status quo.

In January 2023, the Labor Department under the Biden administration finalized a rule that allows retirement plan fiduciaries to consider ESG factors when making investment decisions. It also maintains the department's position that fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.

Still, that rule has faced significant pushback since its finalization and currently faces a lawsuit filed by a group of 26 Republican attorneys general, along with several energy companies and private individuals.

Lichtenstein said the rule, commonly referred to as the DOL’s ESG rule, is “very likely to be changed if there's a change in the administration,” given its history.

The current rule reverses two rules previously promulgated under the Trump administration that said ERISA fiduciaries could not invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk, and outlined the process for a fiduciary to take when making decisions about casting a proxy vote.

While some contend the two versions of the rule are quite similar, the Biden administration's rule explicitly allows for investing with ESG factors in mind, like other factors, and department officials and retirement industry stakeholders contend that the rule is neutral.

“My expectation is that a hypothetical (second) Trump administration likely would either revert back to the rule that it had in place or make modifications to the Biden (administration’s) rule to bring it more in line with the (previous) rule,” Lichtenstein said.

However, the outcome of the lawsuit against the DOL’s ESG rule will be an important factor going forward, according to Bryan McGannon, managing director at US SIF: The Sustainable Investment Forum, a nonprofit whose members represent $5 trillion in assets under management.

That’s because if “the court determines now that the DOL exceeded its authority (on that rule), that also means that a new Trump administration can't write a rule (like) that, because Congress has not given them authority,” McGannon said.

On July 18, the 5th U.S. Circuit Court of Appeals in New Orleans directed the district court where the case was originally filed to reconsider the lawsuit, given a recent U.S. Supreme Court decision.

That decision overturned a concept known as Chevron deference: a 40-year-old standard that said judges should defer to regulators when laws are ambiguous and unclear.

Lichtenstein noted that even if a second Trump administration doesn't make changes to the DOL'S ESG rule, “public statements, self-regulatory guidance and other things certainly could have the effect of making plan sponsors more ESG-hesitant again."

“It's impossible to predict exactly what any administration will do, but I would expect, given stated views, that we probably would see more anti-ESG pushes on the DOL side (if Trump wins the election),” Lichtenstein said.

“The biggest question is whether (that) would expand to … plans not being permitted to invest with institutions that are deemed to be boycotting the fossil fuels industry, or the firearms industry, or certain other industries,” Lichtenstein added. So far, he said those types of restrictions have only been implemented at the state level.

If the DOL finalized such a rule at the federal level, Lichtenstein said it would almost certainly be challenged in court, and a lawsuit would likely be successful.

McGannon contended that changes at the DOL or SEC under a second Trump administration would “more likely take the form of rolling back progress” rather than “proactively punishing sustainable investing.”

Among the 20 "core promises" outlined in Trump's platform, which does not explicitly mention ESG, are to "cancel the electric vehicle mandate and cut costly and burdensome regulations,'' as well as "make America the dominant energy producer in the world, by far.''

Vice President Kamala Harris, who recently secured the Democratic presidential nomination, has yet to release her official policy platform ahead of the Democratic National Convention, which begins Aug. 19.

“I don't think it would be a surprise for (the Trump administration) to appoint an SEC chair that would not be in favor of ESG and sustainable investing topics,” according to McGannon.

Republicans in Congress have repeatedly criticized current SEC Chair Gary Gensler for the agency’s promulgation of a rule requiring public companies to disclose a host of climate-related information in registration statements and periodic reports. After the rule faced nine lawsuits against it, all challenges were combined to be heard by the 8th Circuit on a consolidated basis, and the SEC in April halted implementation of the rule pending the legal challenge.

Regardless of who leads the SEC, McGannon said US SIF “would continue to work to educate and meet with them, as (it’s) always done with both sides in the commissioner-level offices.”

“We want to continue to make sure that the SEC fully understands the role sustainable investment plays, and how … investors consider these criteria for long-term risk and opportunity,” McGannon said.

If Trump wins the White House but Democrats maintain control of at least one chamber of Congress, “the limited set of tools they have will be oversight,” according to McGannon. “So (Democrats) would do more hearings and ask hard questions of the (new) SEC chair or the (new) labor secretary.”

McGannon said that would be a similar but flipped situation to the current one, in which Republican leaders in the House have often held hearings criticizing agency rules and asking tough questions of those in the Biden administration.

In July 2023, GOP leaders of the House Financial Services Committee held several hearings over the course of the month dedicated to discussing various aspects of ESG, often calling the movement "woke."

Another option for congressional oversight is invoking the Congressional Review Act, or CRA, which allows Congress to overturn a federal agency rule with a simple majority vote.

In March 2023, Republicans passed a joint resolution in both the House and Senate to overturn the DOL's ESG rule via the CRA. However, after President Joe Biden vetoed the resolution, the House fell short of the two-thirds vote needed to override the veto.

“I certainly wouldn't say that the CRA is a tool that we wouldn't expect Democrats to use, even though it has been much more utilized by Republicans than by Democrats, and much more utilized in the last several years than it has been in its entire history, of course,” Lichtenstein said.

McGannon said that if Democrats were to invoke the CRA for a new Trump-era regulation, they would likely face a presidential veto, “so it's more of a messaging exercise than an actual policy tool.”

“There’s a danger in using the CRA,” Lichtenstein noted, as doing so prohibits an agency from promulgating a similar rule down the line.

According to a Congressional Research Service report, successfully using the CRA not only overturns the rule it targets, but it also “bars the agency from issuing another rule in ‘substantially the same form’ as the disapproved rule unless Congress authorizes the agency to do so in a subsequent law.”

Ultimately, should Harris win the presidential election, maintaining Democrats’ control of the federal agencies, both sources said they expect things to essentially remain the same in terms of ESG-related actions.

“I would expect status quo” or expansion of ESG-related activity at the Labor Department, Lichtenstein said. He predicted that the department may start to initiate disaggregation, meaning instead of more “general ESG rules, we see rules that are focused more on one specific aspect (of ESG).”

McGannon hopes the SEC could work on finishing up a rule mandating human capital management disclosure, which is something US SIF as well as other industry groups, lawmakers and the SEC's Investor Advisory Committee have all asked the SEC to do.

The agency has yet to propose such a rule, though it again said it plans to do so in its most recent regulatory agenda, after first including the proposal on its regulatory agenda in spring 2021.