Texas court rules against American Airlines in ESG 401(k) plan case

A federal judge in Texas has ruled that American Airlines violated federal law by incorporating environmental, social, and governance principles into its employee retirement plan investment decisions.

The Friday decision reported by multiple news outlets appeared to be the first of its kind, adding to the list of significant challenges to companies using socially conscious investing strategies in their corporate benefit plans.

The ruling also comes amid a broader backdrop of mounting conservative backlash against socially conscious investing, including many voices pushing back against the approach.

The lawsuit was originally brought forward in 2023 by Bryan Spence, one of its pilots, on behalf of more than 100,000 participants in the company’s 401(k) plan. Spence alleged that the inclusion of ESG-focused funds led to underperformance compared to non-ESG options, thereby harming employees’ retirement savings.

As detailed in coverage by Reuters, US District Judge Reed O’Connor found that the airline breached its fiduciary duty under the Employee Retirement Income Security Act by prioritizing ESG considerations over the financial interests of participants in its 401(k) plan. The court criticized American Airlines for allowing its asset manager, BlackRock, to advance goals unrelated to maximizing returns for plan participants.

“ERISA does not permit a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim,” O’Connor said, according to separate reporting by Bloomberg Law. He went on to maintain that ESG investments “often underperform traditional investments by approximately 10%.”

BlackRock itself has been subject to another anti-ESG legal action. In late November, a contingent of 11 states including Texas filed a federal lawsuit againt BlackRock, Vanguard and State Street, alleging that they illegally curtailed competition in the energy space by influencing companies to support climate advocacy objectives.

While American Airlines has not commented publicly on the ruling, BlackRock, which was not a defendant in the case, has previously defended its ESG strategy as being aligned with clients’ long-term goals. However, that's not exactly how O'Connor sees it.

"The evidence made clear that [American’s] incestuous relationship with BlackRock and its own corporate goals disloyally influenced administration of the Plan," O'Connor said, according to Reuters.