• info@esgwise.org

Trump’s Shadow Looms Over US Corporate Pensions

A rule setting parameters for employer-sponsored retirement plans to consider ESG factors appears under threat.

For some time now, investors operating in the US have had to walk a tightrope when weighing up ESG risks and opportunities as part of their overall strategies. Even under the watch of President Joe Biden, political pressure from Republican legislators has driven outflows from ESG funds and made corporations more uneasy about engaging with ESG issues.

Pension schemes have been dragged into the debate. In 2023, trustees of the Massachusetts Pension Reserves Investment Management – which manages pensions for public sector employees, including teachers – debated whether it should continue to use the term ‘ESG’ at all. It elected to rename its ESG committee the ‘Stewardship and Sustainability Committee’.

But public sector schemes, typically being subject to state laws, are not in the eye of an oncoming storm.

Since returning to the White House, President Trump has enacted sweeping reforms – including the banning of diversity, equity and inclusion initiatives in government, curbing federal support for renewable energy and withdrawing the US from the Paris Agreement – that signal danger for any rules that permit or facilitate ESG investment.

Experts believe that corporate pension schemes will feel the full force of President Trump’s campaign against ESG. These are regulated by the Employee Retirement Income Security Act (ERISA) of 1974, which sets minimum standards for private sector pension schemes.

Looser rules designed to give such schemes leeway to factor ESG into their investment approach were introduced in 2022, but these could now face obliteration under President Trump.

“Investment managers will continue to consider ESG, but in doing so they [will] have to think about how direct a relationship there is between these ESG factors and investment performance,” says Patrick Menasco, Partner at law firm Goodwin.

Not materially different

The federal government last revisited its approach to US corporate pension plans conducting ESG investment in 2022, when the Department of Labor (DOL) issued its ‘Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights’ rule.

Coming into force at the start of 2023, the rule – commonly referred to as the ‘Biden rule’, or the ‘New Rule’ – allows employer-sponsored pension schemes to consider ESG as a tool for risk-return analysis, but usually not for non-financial reasons.

The Biden rule replaced the DOL’s ‘Financial Factors in Selection Plan Investments’ rule, also referred to as the ‘Trump rule’ or the ‘Prior Rule’. Introduced in 2020, the rule banned employer-sponsored pension plans from “adding or retaining any investment fund, product, or model portfolio as a qualified default investment alternative…if the fund, product or model portfolio reflects non-pecuniary objectives in its investment objectives or principal investment strategy”.

The Biden rule was introduced in response to “the chilling effect and other potential negative consequences caused by the Prior Rule with respect to the consideration of climate change and other ESG factors”, the DOL said.

“The signalling from the DOL of its views as to whether or not ESG factors often or likely satisfy that investment standard can be important in the marketplace, because the DOL is one of two sources of enforcement of the law,” says an employee benefits lawyer who spoke on condition of anonymity.

If the DOL signals that ESG factors are important to an investment strategy, plan fiduciaries will feel more comfortable that they won’t be investigated over their consideration, the lawyer continues. Fiduciaries will be more cautious if the DOL signals that ESG rarely satisfies investment standards, they add.

In practice, the Biden rule is not materially different to the Trump rule, and does not represent a carte blanche for investors to carry out ESG investment without fear of litigation, rather allowing ESG factors to be viewed as a tie-breaker between otherwise equal rival choices.

“The rules are very strict under ERISA, and so the substance of what they’re saying rarely changes,” says Richard Shea, Senior Counsel at law firm Covington & Burling, adding that the “spin” surrounding these rules are more susceptible to change.

“We analysed both rules very carefully when they came out, and basically found that there’s no substantive differences between them,” Shea says. “The Biden rule was not impactful at all, in the sense that it didn’t really change much of what the law had been”.

The Biden rule was nevertheless challenged by Republican state attorneys-general in 2023 in the Northern District of Texas, who alleged that the Biden rule violated ERISA. The court rejected the litigation.

The DOL’s ESG rule has been subject to litigation in other states, including Utah. “The expectation is that the Trump administration is not likely to defend the rule,” says Ruth Delaney, Partner at law firm K&L Gates. “What happens may depend more so on the courts than rule-making activity at this point.”

“Leftist agendas”

While attempts to rescind the Biden rule have come undone, companies and schemes have found themselves in hot water over ERISA, as the largest airline in the US found. In 2023, American Airlines pilot Bryan Spence led a class-action lawsuit accusing the airline and the managers of its pension plan of violating ERISA.

Spence alleged that the defendants had breached their fiduciary duties under ERISA by investing “with investment managers and investment funds that pursue leftist political agendas through ESG strategies, proxy voting, and shareholder activism activities which fail to satisfy these fiduciaries’ statutory duties to maximise financial benefits in the sole interest of the plan participants”.

In January 2025, Northern District of Texas judge Reed O’Connor – who was appointed by former Republican President George W Bush – ruled that American Airlines had indeed violated its fiduciary obligations to members of its pension plan by allowing asset manager BlackRock to consider ESG factors.

American Airlines’ pension assets were not in BlackRock ESG funds, but O’Connor found fault with the assets being overseen by a manager that has conducted ESG engagement and backed ESG shareholder proposals.

The court ruled that the defendants had violated their duties under ERISA owing to the airline’s “incestuous relationship” with BlackRock, evidenced by its status as the plan’s largest managers, as well as being one of its largest shareholders and having financed around US$400 million of American Airlines’ corporate debt, according to a briefing note by law firm Ropes & Gray.

O’Connor concluded that BlackRock’s influence and its own agenda had impacted the running of the scheme.

A BlackRock spokesperson said: “We always act independently and with a singular focus on what is in the best financial interests of our clients. Our only agenda is maximising returns for our clients, consistent with their choices.” American Airlines was also approached for comment.

“The ruling is solely focused on the investment manager’s proxy voting practices and alleged pro-ESG shareholder engagement,” said Ropes & Gray. “From that perspective, the case can be viewed as another battle in the broader crusade to derail ESG investing practices in the US.”

The decision prompted outcry from campaigners, who warned of the consequences for ESG investing.

“If left to stand, the district court opinion in Spence v. American Airlines poses a serious threat to investors’ right to rely on financial advisors and asset managers or make their own informed decisions about how to invest their retirement savings,” said Danielle Fugere, President and Chief Counsel of shareholder advocacy group As You Sow, after the verdict. “This decision is a threat to the fundamental tenets of capitalism.”

Jason Schwartz, Senior Communications Strategist at The Sunrise Project, a network of groups campaigning against fossil fuels, describes the ruling as “politically motivated”.

“It’s baffling that the consideration of working with a company that has ESG funds available, regardless of whether or not you’ve even invested funds in those ESG products, would be illegal in some way”, he says.

Goodwin’s Patrick Menasco believes that over time some courts will rule in line with O’Connor’s thinking, while others will pursue a different tack, with the Supreme Court eventually being called into action.

“I think that the decision was particular to that court and that judge,” he says. “It’s a largely political issue.”

Enforcement is key

There is a clear desire on the right of American politics to limit pension plans’ scope for considering ESG factors. Removing ESG consideration from ERISA was a stated objective of Project 2025, a feted policy blueprint for President Trump’s administration published in 2023 by The Heritage Foundation, a conservative think tank.

Somewhat inaccurately, the manifesto argued that “because ESG investing necessarily puts other considerations before the interests of the beneficiary, ESG investing by plan managers is an inappropriate strategy under ERISA”. It did, however, say that the DOL’s approach “should not preclude the consideration of legitimate non-ESG factors, such as corporate governance, supply chain investment in America, or family-supporting jobs”.

The document also offered an alternative conservative view, with some apparently believing that it is not wrong for retirement plans to offer options for ESG investment “so long as individuals explicitly acknowledge and choose to pursue investment options that do not exclusively maximise pecuniary gains”.

While President Trump publicly sought distance from Project 2025 during his campaign, recent analysis by TIME magazine found that almost two-thirds of his executive orders so far have reflected its contents.

Lawyers agree that the Biden rule may not be long for this world, warning that the threat of enforcement against investors and companies is enough to “chill” the ESG market.

Covington’s Shea believes that “it’s entirely possible that the Trump administration will revoke some or all of the Biden rule, and replace it with a new Trump rule”. But he argues that the government’s enforcement policy is more important than whether the rule itself is replaced, noting that during the American Airlines case, O’Connor cited the Biden rule several times when reaching his conclusion.

“The existence of the Biden rule did not prevent the judge from finding liability in this case,” Shea says.

The wording of the DOL rule matters, asserts Menasco, arguing that if a manager believes that ESG factors impact the risk/reward profile of a potential investment and acts accordingly, political hostility to considering ESG could result in additional transactional costs. This could take the form of regulatory language or enforcement activity.

“If you threaten enforcement based on a particular view, that’s going to inhibit or chill the market from that activity, regardless of what the law actually says,” he continues, predicting that the law will be changed to be “much more unfriendly to ESG”, prompting litigation.

The post Trump’s Shadow Looms Over US Corporate Pensions appeared first on ESG Investor.

Leave a Reply

Your email address will not be published. Required fields are marked *