
A new ruling of fiduciary liability could cause fiduciaries to further examine firewalls between corporate policy and retirement plan management.
How ESG can Spell T-R-O-U-B-L-E
On January 10, 2025, a United States District Court in Texas ruled that American Airlines had breached its fiduciary duties with respect to American Airlines’ employee 401(k) plans. As described below, this is no ordinary fiduciary case.
Overview
The court ruled that American Airlines (“AA”) breached its duty of loyalty under ERISA by failing to respond to activities undertaken by a plan investment manager (BlackRock) supporting ESG (environmental, social and governance) initiatives. It is important to note that:
- The court was unable to find a breach of prudence—rather it relied solely on the obligation of “loyalty.”
- BlackRock’s pro-ESG activities were unrelated to the actual investment of the American Airlines plans’ assets. Instead, the plaintiffs’ core argument was that AA’s failure to oppose BlackRock’s ESG-related proxy votes—combined with AA’s desire to curry favor with Blackrock—resulted in a violation of AA’s duty of “loyalty” under ERISA.
We’ll come back to the Court’s rationale after we describe the facts utilized by the court.
Key Facts
The judge tied together a number of different factors in reaching its decision. So, before discussing the actual decision any further, it may be helpful to describe these key factors—although the importance of these factors may only become apparent in the next section of this post) :
- Blackrock managed several different investments in the AA plans, including target date funds and indexed funds.[1]
- Blackrock also owned 5% of American Airlines stock and approximately $400 million of its fixed income debt.
- As a part of its investment management services, BlackRock agreed that it would vote proxies on plan holdings consistent with the financial interests of the plans’ participants and then it would submit quarterly attestations that it was complying with this obligation. However, BlackRock failed to submit these quarterly attestations and American Airlines did not monitor or act on BlackRock’s failure.
- The court went to great lengths to distinguish between utilization of ESG factors as a part of assessing financial considerations as opposed to using such factors solely to promote social goals. (“Investing that aims to reduce material risks or increase return for the exclusive purpose of obtaining a financial benefit is not ESG investing….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.”) Without any supporting evidence, the court also asserted that:
By focusing on non-pecuniary interests, ESG investments often underperform traditional investments by approximately 10%. For instance, when compared to the S&P 500 and the Russell 1000 indices in 2023, ESG funds dramatically underperformed non-ESG funds, with ESG-related funds returning about 8% compared to about 14% for both indices.
- The Court then went into detail describing BlackRock’s ESG activities, especially with respect to oil and gas companies, and public statements by BlackRock’s CEO. The Court then concluded that BlackRock’s ESG activism was not related to financial outcomes and waved away, as pretextual, any argument that BlackRock’s ESG activities were in any way linked to financial outcomes, stating:
Absent a cognizable basis for claiming that certain ESG considerations capture material financial risks, slapping the label “financial interest” serves as mere pretext. BlackRock regularly employed rhetorical devices—such as the “long-term” modifier—to discuss some amorphous and unsupported financial benefit of an ESG factor in order to shift attention away from its non-pecuniary goals.
- The Court then wrapped up its “Findings of Fact” by concluding that key individuals at AA had conflicts of interest that, in effect, interfered with their oversight of Blackrock. For example, as noted by the Court, “[f]or instance, one of the main American officials responsible for the day-to-day oversight of the Plan’s investment managers … also managed the corporate financial relationship between American and BlackRock.”
The Court’s Analysis
The Court determined that AA had met the prudence requirement of ERISA, acknowledging that AA maintained a “robust process for monitoring, selecting and retaining managers” and that “Plaintiff offered no expert opinion or evidence that Defendant’s measures fell short of then-prevailing fiduciary practices”.
Despite (or, perhaps, because of) the Court’s inability to find a breach of the prudence standard, the Court could not resist some gratuitous grousing, observing:
At the end of the day, Defendants oversaw and monitored the Plan consistent with prevailing industry standards, even though the result is due to the incestuous industry comprised of powerful repeat players who rig the standard of care to escape fiduciary liability.
Without a breach of prudence, the Court then combined the facts listed above to create a breach of loyalty. Although the word “loyalty” is not used in ERISA, under Section 404 “a fiduciary is required to discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and …for the exclusive purpose of …providing benefits to participants and their beneficiaries.” This is interpreted to mean that decisions made with respect to a plan must be based solely on plan-related considerations.
The Court concluded that AA fell short of this standard by allowing two factors to improperly influence the plan fiduciaries’ behavior toward BlackRock’s ESG activities: BlackRock’s holdings of AA stock and bonds and AA;s own corporate policies favoring ESG factors. As stated by the Court:
[T]he Court concludes that Defendants acted disloyally by failing to keep American’s own corporate interests separate from their fiduciary responsibilities, resulting in impermissible cross-pollination of interests and influence on the management of the Plan. The most obvious manifestation of this is found in American’s relationship with BlackRock. Because of American’s corporate goals and as a complement to them, Defendants did not sufficiently monitor, evaluate, and address the potential impact of BlackRock’s non-pecuniary ESG investing. Together, the influences of these non-Plan interests constituted a breach of loyalty, allowing BlackRock to engage in ESG-oriented proxy voting and investment strategies using Plan assets.
In finding this breach, the Court emphasized AA’s own corporate ESG initiatives (such as AA’s support for plant-based sustainable aviation fuel). Per the court, AA’s corporate ESG goals created a burden for AA to create measures to prevent “cross-pollination” of corporate ESG goals with plan management.
One can raise a number of questions about the Court’s representations of facts and resulting analysis. However, most significantly, the Court cites no basis for its conclusion that AA’s inaction over BlackRock’s proxy and ESG activities was influenced by Blackrock’s financial holdings in AA or AA’s own ESG posture. In effect, the Court imputes a connection between these two factors to create a fiduciary breach—but cites no actual connection between the two. This is a shaky basis for determining that AA breached its fiduciary obligations .
A Real Trial
As a last point, it is important to note that this opinion is the result of a trial that occurred before a judge. Very few ERISA fiduciary cases have gone to trial. For that reason alone, this case is unusual. More significantly, even if the decision is overturned, the determinations –especially the factual determinations–made by this judge are likely to reverberate in future ERISA fiduciary liability cases.
What Next?
This case is not over yet—the judge has ordered briefings by the parties on a number of related issues around whether the plans actually incurred any losses. And, of course, appeals await. However this case plays out, the risk is that this case has expanded potential claims for fiduciary liability—where plaintiffs can allege a fiduciary breach of loyalty with little connection to actual plan-related activities and even less evidence of actual failure of ERISA’s standards. One more item for our fiduciary checklist.
[1] Significantly, the court cited no evidence that BlackRock applied ESG factors in its investment management activities.