Part 1: How 2025 Federal Policy Affects State Pension Plans

As 2025 unfolds, state pension funds face an increasingly hostile federal policy environment that threatens responsible investing and fiduciary stewardship. From regulatory rollbacks to politically motivated attacks on proxy voting and ESG policies, pension stakeholders must prepare for new risks that could undermine their ability to safeguard long-term financial stability. 

The recent shifts—including the Supreme Court’s reversal of the Chevron doctrine and federal actions targeting climate-conscious investment strategies—signal a broader effort to weaken the tools pension funds use to manage systemic financial risks, particularly those related to climate change. This post breaks down the key federal or national-level threats underway as of February 18, 2025.

Policy and client attacks to achieve a chilling effect on institutional investor proxy voting. 

A recent example: Institutional Shareholder Services (ISS) “will no longer consider the gender and racial and/or ethnic diversity of a company’s board when making vote recommendations concerning the election or reelection of directors at U.S. companies under its benchmark and specialty policies.” 

The timing of this announcement raised eyebrows, as it was on the tail of ISS recommending investors vote to maintain DEI policies at Apple just four days prior. It’s raising questions within the investment community as to whether these changes are based on assessments of financial materiality, or more about aligning with political shifts in the country. 

The Supreme Court overturned the “Chevron doctrine,” which required courts to defer to Federal agencies’ interpretations of laws - environmental, healthcare, food and drug safety, labor rights, and gun laws are affected - thus sharply cutting these agencies’ power. Supreme Court has knocked out a core pillar of American administrative law and created a real risk of regulatory chaos across a range of policy domains.

Litigation and investigative strategies seeking to intimidate pension funds.

We should anticipate increased investigations and acts of intimidation, such as from the House of Representatives, along with a new wave of congressional bills seeking to codify anti-ESG investing policies that are growing on the state level. 

The Administration supports legislation that restricts institutional investors’ consideration of environmental, social, and governance (ESG) risks in investment decisions and proxy voting. Escalating state-level legislation, political actions, and legal challenges from anti-responsible investing financial officers or attorneys general will create additional legal uncertainty, unreliable data, and fear.

Erosion of federal bodies and regulatory rollbacks that threaten previous gains through SEC and Department of Labor rulemaking. 

Securities and Exchange Administration (SEC) made two relatively unsurprising but timely reversals. First, it will ask courts not to schedule arguments in lawsuits challenging its climate disclosure rule, effectively leaving the reporting requirements in limbo. Then, a reversion to its approach to non-action relief requests before the previous administration, which took a more liberal approach to shareholder proposals appearing on company ballots as long as they addressed a major social issue. Taking a company-by-company approach, as the Commission says it will now do, is likely to lead to more proposals being blocked for a lack of immediate impact on the company’s stock. President Trump also continues his focus on dismantling anything that is or is alleged to be DEI. 

While the impact on investor voting choices could take some time to unravel, it seems likely that management teams will find themselves more protected from shareholder pressure for the foreseeable future. We should also anticipate an increasing lack of reliable public company disclosure and increased risks in the private markets. 

Preparing for What's Next: Safeguarding Pension Funds in 2025

Evolving federal policy developments present serious challenges for pension funds. As these threats intensify, pension stakeholders must stay informed and take proactive measures to safeguard their ability to manage long-term financial risks. But knowledge alone isn’t enough—action is key. 

In Part 2: What Pension Funds Can Do to Protect Themselves and Advance Responsible Investing, we’ll explore the actions pension funds can take to fortify their investment policies, strengthen fiduciary protections, and maintain their power to drive responsible corporate governance. Read on to learn how pension funds can protect themselves and continue advancing climate-conscious, risk-aware investment strategies.