US Judge Rules American Airlines’ ESG 401(k) Investments Illegal.
A federal judge in Texas ruled on Friday that American Airlines contravened federal law by making investment decisions for its employee retirement plan based on environmental, social, and other non-financial considerations. The decision by U.S. District Judge Reed O’Connor appears to be unprecedented, occurring amidst increasing opposition from conservatives against the rise of socially responsible investing. Judge O’Connor determined that American Airlines had failed to fulfill its legal obligation to prioritize the financial interests of 401(k) plan beneficiaries, as it permitted BlackRock, its asset manager and a significant shareholder, to emphasize environmental, social, and corporate governance (ESG) factors in its investment strategy.
“The evidence made clear that [American’s] incestuous relationship with BlackRock and its own corporate goals disloyally influenced administration of the Plan,” wrote O’Connor, an appointee of Republican former President George W. Bush.
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 maximizing returns for our clients, consistent with their choices.”
The judge issued a ruling following a four-day non-jury trial conducted in June, pertaining to a class action lawsuit initiated by American pilot Bryan Spence on behalf of over 100,000 individuals enrolled in the retirement plan. O’Connor indicated that he would later determine whether the class members experienced financial damages and whether American is liable for compensation. In a statement, American announced that it is currently reviewing the ruling. Attorneys representing Spence did not provide an immediate response to inquiries for comments. BlackRock, which announced on Thursday its withdrawal from an environmentally focused investor group due to pressure from Republican officials, is not a party to the lawsuit.
In November, BlackRock, along with two competing asset management firms, faced a lawsuit from 11 states led by Republican officials. These states allege that the companies breached federal antitrust laws through their climate activism, which purportedly led to a decrease in coal production and an increase in energy costs. BlackRock has dismissed these allegations as unfounded. In 2023, Spence initiated legal action against American, asserting that the company violated the federal Employee Retirement Income Security Act (ERISA) by failing to uphold its fiduciary duty to 401(k) plan participants and by not managing their assets prudently.
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In February, Judge O’Connor dismissed American’s argument for the lawsuit's dismissal, stating that Spence had adequately demonstrated that the 401(k) plan had not performed as expected, thus allowing the case to proceed to trial. On Friday, the judge ruled that American had indeed violated its duty of loyalty to the participants of the retirement plan. However, O’Connor noted that the company's actions did not breach its duty of prudence, as they were in line with the prevailing standards of the industry. Judge O’Connor is recognized for her tendency to rule in favor of conservative plaintiffs contesting laws and regulations related to firearms, LGBTQ rights, and healthcare.
In 2023, the Biden administration implemented a regulation permitting 401(k) and other retirement plans to consider environmental, social, and governance (ESG) factors as a deciding factor when investment options are financially comparable. This new regulation replaced a rule established during the administration of Republican President Donald Trump, which prohibited the consideration of non-financial factors. This earlier regulation could potentially be reinstated if Trump assumes office again later this month. Currently, a federal judge in Texas is reviewing a legal challenge to the Biden administration's rule, brought forth by 25 states led by Republican officials and the oil drilling company Liberty Energy.
A federal judge's ruling against American Airlines highlights the growing tension over ESG investing in retirement plans. This case underscores the legal obligation to prioritize financial returns over non-financial considerations under ERISA. As debates over ESG policies intensify, this decision may influence future regulations and corporate investment strategies in the U.S.
