On January 10, 2025, after a four-day bench trial, the United States District Court for the Northern District of Texas issued findings of fact and conclusions of law holding American Airlines and the American Airlines Employee Benefits Committee liable for breaching their duty of loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) with respect to investing employees’ retirement assets towards environmental, social, and governance (“ESG”) objectives.  Spence v. American Airlines, Inc., et al., No. 4:23-cv-00552, Doc. 157 (N.D. Tex.).  

The plaintiff plan member claimed that the defendants failed to act in the best financial interests of the plan by allowing BlackRock, the investment manager for all passively managed plan funds, to pursue ESG objectives through proxy voting and shareholder activism.  The Court found that while the defendants’ practices were consistent with prevailing industry standards, which shielded them from liability for alleged breaches of their duty of prudence, they breached their duty of loyalty by failing to maintain the necessary separation between corporate interests and fiduciary responsibilities.

Specifically, the Court concluded that the defendants allowed American Airlines’ corporate ESG goals and BlackRock’s influence to impact the management of the retirement plan.  In addition to being an investment manager for the plan, BlackRock was one of American Airlines’ largest shareholders and had provided American Airlines significant debt financing.  As a result of this influence, American Airlines failed to adequately monitor and address BlackRock’s ESG-focused investment strategies, which did not focus solely on obtaining a financial benefit for the plan.  

While the Court noted that it is permissible to consider ESG risks when done through a strictly financial lens, the Court found that no member of the benefits committee took any action to question BlackRock or ensure it acted in the best financial interests of the plan.  Similarly, the plan fiduciaries relied on Aon, an outside consultant, to help oversee the plan.  While this helped avoid liability for alleged breach of their duty of prudence, the Court found that defendants never specifically asked Aon to analyze BlackRock’s ESG activism until after the filing of the lawsuit.  The Court also noted that even if the defendants had done so, outsourcing all the monitoring responsibilities to Aon likely would not have been sufficient to insulate them from a breach of loyalty claim because the fiduciaries themselves needed to have taken some step to address BlackRock’s pursuit of non-pecuniary interests that could harm the plan.

The Court emphasized that while the defendants’ actions were consistent with industry standards, and thus did not violate the duty of prudence, the “incestuous” nature of the retirement plan industry and the influence of major players like BlackRock necessitate a higher standard of loyalty to protect the financial interests of plan participants.  This case demonstrates that plan fiduciaries need to be mindful of ESG investments and must carefully analyze the financial implications of such investments.  Subcontracting plan oversight may help to protect against a breach of the duty of prudence, but plan fiduciaries must take an active role to meet the higher loyalty standard.

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