Loading article...
On January 10, 2025, the United States District Court for the Northern District of Texas, in Spence v. American Airlines, found that American Airlines, as a fiduciary of its two major 401(k) plans, had violated its ERISA duty of loyalty in allowing/not monitoring “ESG activism” (principally in proxy voting and “jawboning” management of portfolio companies) by the plans’ largest investment manager, BlackRock, with respect to stock held in plan index funds managed by BlackRock.
In this article we begin with a summary of the court’s decision and some key takeaways. We then highlight the two key aspects of the court’s decision – its application of ERISA’s duty of prudence and duty of loyalty rules to the facts of this case.
Summary
Findings of fact: The court found that –
BlackRock engaged in ESG activism. During the relevant period, BlackRock engaged in a course of “ESG activism,” primarily through the exercise of voting rights of shares held in index funds it managed for the plan and letters to portfolio company management.
Plan fiduciaries paid almost no attention to these issues. The American plan fiduciaries generally did not monitor and did nothing to change or stop this activity by BlackRock.
Holding: The court held that –
American’s conduct was not imprudent because ERISA’s prudence standard is based on industry practice. Even though “the evidence revealed ESG investing is not in the best financial interests of a retirement plan,” American’s failure to act on this issue did not violate the ERISA duty of prudence. ERISA’s fiduciary prudence standard is based on “prevailing industry standards” and American “did not imprudently deviate from the industry standard.” In effect, American did not act “imprudently” because “everyone else was doing the same thing.”
American’s conduct did, however, violate ERISA’s fiduciary duty of loyalty. Because of American’s conflicting financial interests (BlackRock “owned 5% of American stock [and] financed approximately $400 million of American’s corporate debt”) and corporate commitment to ESG policies, which (in plan fiduciary decision making) American failed to mitigate, American “did violate ERISA’s duty of loyalty standard.”
Damages/remedies: The court deferred the issue of damages and whether it should issue an injunction until further briefing by the parties.
Takeaways
A big question will be: will the court find any damages or issue an injunction? But even without that, the “reputation” effect of this decision, both for American and for BlackRock, is significant. Our guess is this decision will be appealed.
The decision sets a standard for “pecuniary”/financially justified ESG investing/proxy voting that is higher than that articulated in DOL’s most recent revision of its regulation (and, indeed, has more in common with the Trump DOL’s version of that regulation). It requires (in effect) a showing that consideration of ESG factors with respect to, e.g., a particular proxy voting position, is justified based on an objective, rigorous analysis. If that element of this decision holds, sponsors will want to consider revisiting their ESG proxy voting policies generally.
Prudence and the prudence standard
While the court found that American’s conduct passed an “everybody else is doing it” ERISA prudence standard, it was extremely critical of that conduct and of that standard:
Notwithstanding this conclusion [that American did not violate ERISA’s “everybody else is doing it” ERISA prudence standard], the Court would be remiss if it did not remark on the problematic nature of this outcome. It is clear that the “incestuous” nature of the retirement plan industry [that is, that many plan investment managers hold significant equity stakes and may be significant creditors of the plan’s sponsor] makes a finding of imprudence essentially impossible in certain situations. By mirroring the prevailing practices of the fiduciaries who set the industry standard alongside BlackRock – even if those practices are not in the best financial interests of a retirement plan – Defendants escape liability under the prudence standard. To be sure, this is a shocking result given that the evidence revealed ESG investing is not in the best financial interests of a retirement plan. But no matter how problematic the outcome, the Court’s conclusion on the prudence claim is the result a faithful application of what the law demands. … It nevertheless remains within the province of the legislature to change ERISA’s legal landscape to avoid future unconscionable results like those here.
These are, as it were, “fighting words” for aggressive advocates of ESG investing/proxy voting practices. At a minimum, they open an argument over its viability.
The court’s ERISA fiduciary loyalty standard analysis
The court’s critical holding was that in allowing BlackRock to continue its ESG activism American (as a plan fiduciary) “did not act with an ‘eye single’ toward maximizing the financial benefits,” but rather with an eye towards “American’s own corporate interests and the influence of a major industry player [BlackRock].” It supported of this holding the court found that:
“BlackRock’s investment strategy during the Class Period was focused on ESG investing. Such a pursuit of non-pecuniary interests, in whole or in part, was an end itself rather than as a means to some financial end. This was a major red flag that Defendants wholly ignored.”
American knew it had a financial conflict with BlackRock, which was both the Plan’s largest investment manager and one of American’s largest shareholders, owning 5% of American stock and holding around $400 million of American corporate debt.
American itself had “proudly expressed a corporate commitment to ESG goals – specifically, climate change initiatives.”
While American had taken steps to minimize conflicts with other entities (e.g., the plan’s auditor KPMG), it took no such steps with respect to BlackRock’s ESG-related efforts.
American “never specifically asked Aon [the plan committee’s investment consultant] to analyze BlackRock’s ESG activism, including through proxy voting, until after the filing of this lawsuit in 2023.”
* * *
We will continue to follow these issues.