House passes ESG legislation

On January 15, 2026, the House of Representatives passed the “Protecting Prudent Investment of Retirement Savings Act.” This legislation is to a large extent based on (Trump) Department of Labor 2020 guidance with respect to ESG investing and proxy voting. That regulation was revised in 2022 by the Biden DOL. Republican policymakers have been critical of those Biden-era changes, and this legislation, while not likely to get enough support to force a vote in the Senate, highlights issues that are likely to be addressed in Trump Administration regulatory action.

In this article we review this legislation in depth.

This legislation comes in two parts – rules for ESG investing and rules for proxy voting. Both parts depend, however, on a distinction between decisions (with respect to e.g., fund menu construction or the voting of proxies) based on “pecuniary factors” vs. “non-pecuniary factors” and we begin with a discussion of that key concept.

What is a “pecuniary factor” and why does it matter?

The bill defines “pecuniary factor” as: “a factor that a fiduciary prudently determines is expected to have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy.”

The concept “pecuniary factor” was also used in the Trump DOL 1.0 rule. It was subsequently deleted in the Biden DOL revision of those rules, with DOL suggesting that “investor confusion about [the term “pecuniary”], including whether climate change and other ESG factors may be treated as ‘pecuniary’ factors under the regulation, has already had a chilling effect on appropriate integration of climate change and other ESG factors in investment decisions.” The Biden DOL had substituted the term “risk/return factor” for “pecuniary factor.”

Now let’s turn to the bill’s rules for ESG investing.

Rules for ESG investing

The bill provides that fiduciaries

• May evaluate investments “based solely on pecuniary factors”

• May not subordinate participant retirement income/financial benefits to other objectives

• May not sacrifice return/take on risk “to promote non-pecuniary benefits or goals”

• Must weight pecuniary factors to reflect a prudent assessment of risk/return.

Exception tiebreaker rule – additional documentation required

Quoting the bill’s text:

[I]f a fiduciary is unable to distinguish between or among investment alternatives … on the basis of pecuniary factors alone, the fiduciary may use non-pecuniary factors as the deciding factor if the fiduciary documents:

(i) why pecuniary factors were not sufficient …

(ii) how the selected investment compares to the alternative investments with regard to the composition of the portfolio with regard to diversification, the liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan, and the projected return of the portfolio relative to the funding objectives of the plan

(iii) how the selected non-pecuniary factor or factors are consistent with the interests of the participants … in their retirement income or financial benefits under the plan.

Participant-directed DC plans

An investment (e.g., an ESG fund) may be included in a participant directed DC plan’s fund lineup if its selection satisfies ERISA duty of loyalty and prudence requirements, and it is not part of the plan’s default investment. Exclusion of ESG funds from the plan’s default investment was, again, a provision of the Trump 1.0 DOL rule that was deleted in the Biden DOL revision.

Special notice for “brokerage window” investments

With respect to plan investments that are not “designated investment alternatives” (generally, investments made via a brokerage window or similar arrangement), “each time before … a participant … directs an investment into, out of, or within [the brokerage window], such participant is notified of, and acknowledges, each element of [the following model notice”:

1. Your retirement plan offers designated investment alternatives prudently selected and monitored by fiduciaries for the purpose of enabling you to construct an appropriate retirement savings portfolio. In selecting and monitoring designated investment alternatives, your plan’s fiduciary considers the risk of loss and the opportunity for gain (or other return) compared with reasonably available investment alternatives.

2. The investments available through this investment arrangement [e.g., a brokerage window] are not designated investment alternatives, and have not been prudently selected and are not monitored by a plan fiduciary.

3. Depending on the investments you select through this investment arrangement, you may experience diminished returns, higher fees, and higher risk than if you select from the plan’s designated investment alternatives.

4. The following is a hypothetical illustration of the impact of return at 4 percent, 6 percent, and 8 percent on your account balance projected to age 67.

Illustration. The notice … shall also include a graph displaying the projected retirement balances of such participant … at age 67 if the account of such individual were to achieve an annual return equal to each of the following: (i) 4 percent; (ii) 6 percent; (iii) 8 percent.

Rules for proxy voting

We begin discussion of these rules with some preliminary remarks about the politics of this issue:

It’s likely that the issue of ESG-influenced proxy voting will be a more critical area of dispute than ESG investing. With respect to ESG investing, in a participant directed plan, participants can (as it were) “vote with their feet.” And in a DB plan, the consequences of any ESG investment that gets poor returns will have to be made up by the sponsor.

But a proxy voting policy that, e.g., aggressively pushes certain ESG objectives may have consequences for the broader economy. This is vividly illustrated in the American Airlines ESG litigation, which started its life as a challenge to the inclusion of ESG funds in American’s 401(k) plans but very soon morphed into a challenge to the ESG proxy voting policies of those plans’ index fund managers. Those policies, plaintiffs argued (in detail), were used to change the composition of Exxon’s board and to effect Exxon’s allocation of investment capital to ESG energy projects, to the (alleged) detriment of the value of Exxon stock (and energy sector capital allocation more broadly) held, e.g., by the plans’ S&P 500 index funds.

Underneath all of this is (among other things) a challenge by Republicans to the proxy voting policies of the two dominant proxy advisory firms (ISS and Glass Lewis), which they believe exercise an “outsized influence … on the proxy voting system,” have a “tendency to overlook the economic impact of shareholder proposals,” and “by prioritizing social and political issues over financial analysis, … can undermine the fundamental purpose of the proxy voting system.”

To avoid this ESG “index fund-to-proxy advisory firm pipeline,” the focus of Republicans has been (1) to get more fiduciary scrutiny of the proxy voting policies of index fund managers and proxy advisory firms and (2) to expand the situations in which it is “OK” under ERISA for a fiduciary not to take a side (not to vote a proxy) on an issue it views as immaterial to financial performance. Democrats (e.g., the Biden DOL) have opposed this effort. The “Protecting Prudent Investment of Retirement Savings Act” reflects these concerns, and (as we said) may forecast what a Trump 2.0 DOL ESG regulation will look like.

General fiduciary proxy voting rules

Under the bill, in voting proxies, a fiduciary must comply with ERISA’s general prudence and loyalty rules and must:

• Act solely in accordance with the economic interest of the plan and its participants and beneficiaries

• Consider any costs involved

• Evaluate material facts that form the basis for any particular proxy vote or exercise of shareholder rights, and

• Maintain a record of any proxy vote, proxy voting activity, or other exercise of a shareholder right, including any attempt to influence management.

Furthermore, the fiduciary “shall not subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or promote non-pecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries.”

When may a proxy not be voted?

The bill provides that ERISA’s fiduciary rules “[do] not require the voting of every proxy or the exercise of every shareholder right.”

Similar language was included in the Trump 1.0 DOL proxy voting rule, but was taken out by the Biden DOL revision, which stated that “the Department is concerned that [this] statement could be misread as suggesting that plan fiduciaries should be indifferent to the exercise of their rights as shareholders.”

Safe harbor “non-votes”

In a similar vein, the Trump 1.0 DOL identified two fiduciary “safe harbor” policies that sponsors could adopt, specifying circumstances in which plan-held shares would not be voted:

A policy limiting voting “to particular types of proposals that the fiduciary has prudently determined are substantially related to the issuer’s business activities or are expected to have a material effect on the value of the investment.”

A policy of not voting on proposals when the plan’s holding is below a prudently determined threshold.

The Biden DOL stripped this provision out in their revision of the Trump 1.0 DOL rule. The Restoring Integrity in Fiduciary Duty Act would restore these safe harbors.

Supervision of proxy voting/policies of managers and proxy advisory firms

The bill also provides for heightened fiduciary scrutiny (“exercise [of] prudence and diligence”) in choosing persons (e.g., advisory firms) “to advise or otherwise assist with the exercise of shareholder rights.” And where authority to vote proxies has been delegated to a fund manager or advisory firm, “a responsible plan fiduciary shall prudently monitor the proxy voting activities of such investment manager or advisory firm and determine whether such activities are in compliance with [the general fiduciary proxy voting requirements described above].”

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As we said at the beginning, these issues are likely to be a regulatory priority of the Trump Administration, and we will continue to follow both the legislative progress of this bill and related regulatory initiatives by DOL.