Environmental, social, and governance (ESG) financial returns and risk management and structured to withstand scrutiny across overlapping and, at times, conflicting federal and state regimes.
This Insight, based on a presentation from our Global ESG Trends webinar series, examines four areas where US regulatory and litigation pressure has been most pronounced.
ESG INVESTING IN THE US TODAY
The US ESG legal landscape is increasingly defined by a continuing legal battle over the role of ESG factors in investment decision-making. That battle is unfolding at multiple regulatory levels and across a wide range of legal doctrines, creating a sense of whiplash as policies shift and new enforcement practices emerge. Tensions exist not only between the federal government and the states but also between the US Congress and federal agencies and between “blue” and “red” states.
Proponents of ESG investing argue that ESG factors are relevant to long-term wealth creation because they are material to financial performance and that ESG integration responds to investor demand and evolving expectations around climate risk, human capital management, and corporate accountability.
Critics, by contrast, frame ESG as ideologically motivated, asserting that it elevates non-financial goals over investor returns and undermines fiduciary duties.
These competing narratives form the backdrop for a rapidly evolving patchwork of laws, enforcement actions, and litigation that directly affect how ESG considerations are framed, implemented, and disclosed in the United States.
HOW STATES ARE RESHAPING ESG INVESTING
Why State ESG Policy Matters
State ESG policy has outsized importance because of the sheer size of US public pension and state-controlled assets, which often serve as the first testing ground for ESG mandates and prohibitions. State laws and attorney general actions are increasingly targeting investment decision-making frameworks, proxy voting and engagement practices, and commercial relationships with state entities.
For investment managers and institutional investors, the practical impacts can include placement on restricted or blacklist regimes, heightened disclosure and reporting obligations, and exposure to investigations or litigation. For non-US managers, particularly those in Europe, these dynamics underscore the need to translate existing ESG approaches into a form that travels well in the United States, making clear how ESG factors relate to return and risk, mapping strategies to differing state rules, and aligning governance and disclosure practices with US expectations.
A Fragmented and Evolving State Rulebook
Since 2021, a growing number of states have enacted ESG-related statutes, regulations, and policy directives, producing a complex and sometimes internally inconsistent mix of requirements and prohibitions. There is no single US ESG rulebook. Instead, states have adopted a range of approaches, including the following:
Prohibitions on ESG consideration, which often require investment decisions to be based solely on “pecuniary” factors and restrict the pursuit of non-pecuniary goals through investment or stewardship activities
Prohibitions on ESG discrimination, which bar state actors or companies doing business with the state from “discriminating” against particular industries or entities based on ESG-related criteria or scores
No-boycott regimes, which require state officials to identify financial institutions deemed to “boycott” specified industries (e.g., fossil fuels) and restrict state entities from contracting or investing with listed firms
ESG consideration requirements and ESG-based investment prohibitions, which promote or mandate the integration of ESG factors or restrict investment in designated sectors
Disclosure laws, which require entities to disclose whether and how ESG factors are considered, including climate-related risk and emissions reporting requirements
How State Rules Operate in Practice
State ESG rules typically focus on public assets (such as state pension plans, treasuries, and university endowments) and state contracting activities involving banks, underwriters, and investment managers.
States deploy multiple enforcement levers, including conditions on investing state assets, procurement and contracting restrictions, disclosure and attestation requirements, scrutiny of proxy voting and engagement practices, and investigations or administrative actions led by attorneys general. A key practical takeaway is that the same global ESG program may be workable in one state while presenting litigation or enforcement risk in another.
Recent state actions illustrate the breadth of these tools, including attorney general suits alleging deceptive practices tied to ESG strategies, updates to boycott lists that can rapidly change eligibility status, and ongoing litigation over state climate disclosure laws. Even in states viewed as more supportive of ESG, regulators increasingly emphasize substantiation, focusing on what firms actually do and not just what they say. Against that backdrop, “greenwashing” has emerged as a central enforcement theme. Regulators are less concerned with whether a strategy carries an ESG label than with whether claims about ESG integration, impact, or stewardship are accurate, supportable, and grounded in the manager’s actual investment and engagement practices.
WHEN ESG MEETS ERISA
Litigation and Fiduciary Risk
US private retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) present a distinct set of ESG-related challenges. Recent litigation has advanced what has been described as an “ESG-manager theory” of fiduciary breach, expanding the focus to include not just whether a plan offers ESG-branded funds (or considers ESG factors) but also scrutiny of broader ESG activities, particularly proxy voting and engagement undertaken on behalf of the plan.
In a recent case involving a large corporate retirement plan, the court found that the manager’s ESG strategies and proxy voting activities elevated non-financial goals over the best interests of plan participants, violating ERISA’s duty of loyalty. Notably, the court also emphasized the lack of documented, meaningful discussion of proxy voting between plan fiduciaries, consultants, and managers prior to litigation.
Equitable Relief and Operational Impact
In that litigation, although the court ultimately found no financial loss to the plan, it imposed sweeping equitable relief. This included restrictions on proxy voting motivated by non-pecuniary objectives, enhanced independence requirements for plan committees, expanded disclosure and certification obligations, and public reporting of affiliations with ESG-related initiatives.
The case underscores that ERISA-related ESG risk extends well beyond fund labeling. Proxy voting, engagement practices, governance relationships, and external ESG disclosures have become central areas of scrutiny, even for plans that do not offer ESG-branded investment options.
Regulatory Overlay
Litigation risk is compounded by renewed regulatory and political activity. For example, in December 2025, the White House issued an
