New ESG Act Forces Financial Advisers to Prioritize Money Over Social Impact, Demanding Written Waivers for Ethical Investing

The newly proposed Ensuring Sound Guidance Act of 2025 (ESG Act) is taking a hard look at how your financial adviser decides what investment is truly in your “best interest.” Simply put, this bill prioritizes the cold, hard cash return above all else, making it significantly harder—and more bureaucratic—to invest based on non-financial factors like environmental, social, or governance (ESG) concerns.

The New Rule: Money First, Ethics Second

Section 2 of the ESG Act changes the definition of “best interest” for brokers and advisers. Moving forward, they must base their advice primarily on pecuniary factors—meaning anything that directly affects the expected risk and return of your investment over time. This is a big deal. If you want your adviser to skip a stock because the company has a poor environmental record, or if you want to invest in a fund that specifically promotes social justice, that’s now considered a non-pecuniary factor that cannot outweigh the purely financial advice unless you jump through a few hoops.

If you, the client, decide you do want to prioritize those ethical or social factors—say, avoiding fossil fuels—your adviser has to get your explicit agreement in writing. More importantly, they then have to provide a detailed disclosure of the expected financial impact of that choice over a period of up to three years. Think of it as a financial penalty warning label. Once that time is up, they have to send you a follow-up report comparing your actual results to a similar, purely financial benchmark, clearly showing all the fees and costs associated with your ethical choice. For the busy professional trying to align their values with their 401(k), this adds a layer of formal paperwork and documented comparison that could make advisers hesitant to recommend value-based funds at all.

Municipal Bonds Get a Double Dose of Scrutiny

The rest of the bill focuses on two major studies the Securities and Exchange Commission (SEC) must conduct within one year, both centered on the municipal bond market—the debt issued by local governments to fund roads, schools, and infrastructure. These bonds are often considered safe investments, but the bill acknowledges that risks are changing.

First, Section 3 mandates a study on how local governments are currently disclosing climate change and environmental risks to investors. If you own municipal bonds—perhaps through a mutual fund—you’re essentially lending money to a city or county. If that city is on the coast and facing rising sea levels, that’s a financial risk to your investment. The SEC needs to figure out if these risks are being clearly and consistently disclosed. They will then report back to Congress with recommendations on whether new rules are needed to ensure investors know exactly what environmental risks they are taking on.

Second, Section 4 requires the SEC to investigate the effectiveness of existing anti-corruption rules, specifically those designed to stop people from paying bribes or making improper political donations to secure municipal securities business. This is about keeping the system honest. The study must look at whether these rules are actually preventing corruption, or if they are just unfairly limiting the participation of small, minority, and women-owned businesses in the municipal finance world. This review aims to ensure the rules designed to stop backroom deals aren’t inadvertently shutting out smaller firms who play by the rules. The SEC must also report its findings and suggest regulatory fixes to Congress within a year.