American Airlines jets at Miami International Airport. Photo: J. Albert Diaz/ALM
On Friday, a federal judge in Texas ruled that American Airlines breached its fiduciary duty, under the Employee Retirement Income Security Act, by basing investment decisions for its $26 billion employee retirement plan on environmental, social, and other non-financial factors and not in the “best financial benefit” of retirement plan participants, in the biggest victory yet questioning ESG investing.
US District Judge Reed O’Connor said American Airlines had breached its legal duty to make investment decisions based solely on the financial interests of 401(k) plan beneficiaries by allowing BlackRock, its asset manager and a major shareholder, to focus on environmental, social and corporate governance (ESG) factors. The plaintiffs “proved by a preponderance of the evidence” that American acted “with an intent to benefit a party other than Plan participants,” Judge O’Connor wrote.
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Last week, BlackRock, which is not involved in the lawsuit, announced that officially dropped out of the Net Zero Asset Managers initiative, a coalition of top corporations who pledge to reach zero-carbon emissions by 2050. Over the last month, Morgan Stanley, Citigroup, Bank of America, Wells Fargo and Goldman Sachs and, most recently, JP Morgan Chase have all withdrawn from the climate coalition.
The judge’ decision stems from a class action lawsuit, Spence v. American Airlines, filed by Bryan Spence, senior AA pilot, against the airline in June 2023, on behalf of more than 100,000 participants in the plan. The lawsuit accused the airlines of choosing investments that he said pursued "leftist political agendas" and were "flatly inconsistent" with its fiduciary responsibility under ERISA. The former employee alleged that 37% of his retirement savings were invested in BlackRock's Target Date 2045 fund, which uses ESG considerations.
Spence called American Airlines’ actions "perhaps the most severe breach of the fiduciary standard in American history," and stated that "firms whose job is to deliver investment returns are instead weaponizing retirement funds, public pensions and other investments in pursuit of nakedly ideological goals."
Related: BlackRock, Vanguard, State Street sued by 11 GOP states, in ESG lawsuit
American Airlines filed a motion to dismiss the claims, arguing that the pilot never invested in the ESG funds he listed and criticizing him for exploiting the recent politicization of sustainable funds to carry out the suit. "Plaintiff seeks to insert himself into the ongoing, politicized debate over the wisdom of ESG-themed investing," the motion said.
Spence, in turn, doubled down by amending his complaint, maintaining that he was invested in some of the ESG funds listed, including nearly 37% in BlackRock's Target Date 2045 fund. He also said American Airlines chose funds managed by Morgan Stanley Investment Management and State Street Global Advisors, which he said also focused on ESG.
Both sides must now submit evidence to the court to determine what losses, if any, have occurred as a result of BlackRock’s and American Airlines’s ESG investments in the 401(k) plan.
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Lynn Cavanaugh
Lynn Varacalli Cavanaugh is Senior Editor, Retirement at BenefitsPRO. Prior, she was editor-in-chief of the What's New in Benefits & Compensation newsletter. She has worked for major firms in the employee benefits space, Vanguard and Willis Towers Watson, as well as top media companies, including Condé Nast and American Media.
