On January 10, 2025, Judge Reed O’Connor of the United States District Court for the Northern District of Texas ruled, following a four-day bench trial, that an airline breached ERISA fiduciary duties when investing employees’ 401(k) plan retirement assets utilizing investment managers and funds with environmental, social, and governance (“ESG”) objectives. Spence v. American Airlines Inc., et al., No. 23-cv-00552, 2025 WL 225127 (N.D. Tex. Jan. 10, 2025).The Court determined that such investment decisions failed “to loyally act solely in the retirement plan’s best financial interests by allowing their corporate interests, as well as [the investment managers’] ESG interests, to influence management of the plan.”Id. at *2.
In June 2023, plaintiff, a pilot for the company, filed a lawsuit on behalf of class members against the company and its Employee Benefits Committee.The suit alleged that defendants breached their fiduciary duties under ERISA by investing employees’ retirement savings with investment managers and investment funds that pursued activities such as ESG, proxy voting, and shareholder activism—which allegedly failed to maximize plan participants’ financial benefits.ERISA, the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq., establishes the minimum requirements for the fiduciaries who manage retirement investments and imposes accountability should those fiduciaries fail to act in the best financial interests of the retirement plan.
The Court’s decision describes various examples of ESG investing and delineates that “ESG investing is a strategy that considers or pursues a non-pecuniary interest as an end itself rather than as a means to some financial end” (id. at *12) (emphasis in original); in the Court’s view, ESG factors must have economic relevance in order to be permissible under ERISA’s fiduciary obligations standards.Citing statistics about ESG fund performance in major stock indices, the Court stated that “ESG investing is not in the best financial interests of a retirement plan.”Id. at *24 (emphasis in original).Here, the Court concluded that the company “acted disloyally by failing to keep [its] own corporate interests separate from [its] fiduciary responsibilities, resulting in impermissible cross-pollination of interests and influence on the management of the Plan.”Id. at *25.
Specifically, the judge examined the plan’s administration process with respect to the investment manager’s activities, including the Employee Benefits Committee individuals involved in the evaluation, review, and monitoring of the plan investments, as well as proxy voting.The Court emphasized that the investment manager “was never asked to provide any financial or empirical analysis justifying its ESG investing … as in the best financial interest of shareholders.”Id. at *15.
Judge O’Connor concluded that “[t]he evidence made clear that multiple [Employee Benefits Committee] members and [company] officials were aware of [the investment manager’s] non‑pecuniary ESG investing … [and] [d]espite this awareness, no formal evaluation or assessment of [the investment manager’s] ESG crusade commenced.”Id. at *28.The Court gave examples of what it concluded were missed opportunities for plan administration personnel to investigate or increase monitoring of the investment manager’s activities to ensure they were of the most financial benefit to the plan participants.
The Court also concluded that the company’s own corporate ESG goals, such as climate change initiatives, created a conflict of interest when Employee Benefits Committee members failed to maintain a clear separation between such corporate goals and their fiduciary obligations under ERISA.The Court determined that evidence cited from emails and testimony showed that the interests of plan participants had been subordinated to other objectives.The investment manager’s “outsized influence” over the company, including owning a large portion of the company’s shares and debt financing, contributed to the Court’s view of the relationship as being “circular” and ultimately disloyal to plan investors.
In reaching this decision, the Court did not make any findings on the damages that may or may not have resulted from the conduct at issue. The Court instead deferred any ruling on losses and remedies, directing the parties to submit cross-supplemental briefing no later than January 31, 2025, to address questions such as: (1) what losses, if any, are supported by the evidence; (2) what, if any, direct evidence links ESG investing to financial underperformance of the plan in a way that harmed the class members; and (3) if the Court concludes that no actual losses occurred, whether an injunction is still necessary and the appropriate scope for any such injunction.Id. at *31–32.
It remains to be seen what remedy the Court determines based on the supplemental briefing requested from the parties, and the liability ruling itself later may be subject to an appeal. Regardless, the district court’s relatively unprecedented ruling will no doubt attract the attention of companies and their ERISA plan fiduciaries, advisors, and asset managers, with the potential for spillover to other areas of investment fiduciary decision-making.
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