Are All ESG Investments Imprudent? A Plaintiff Suing American Airlines Says Yes

• Jurisdiction: United States,Federal
• Law Firm: Cohen & Buckmann
• Subject Matter: Employment and HR, International Law, Retirement, Superannuation & Pensions, International Trade & Investment
• Author: Carol I. Buckmann
• Published date: 13 June 2023

Heads are spinning over the changing rules governing ESG investing. Investments that take into account environmental, social and governance (ESG) factors have become a political hot potato for public plans governed by state laws, and ERISA fiduciaries who make or advise about investments in private employer 401(k) and ERISA-governed 403(b) plans have been put in what can only be called a "no win" situation by competing pressures.

Investment professionals can point to situations where factors, such as required environmental cleanup or poor governance, can diminish investment returns and to other situations where good governance and positive practices may increase returns. Younger participants, in particular, want ESG investment options and some are demanding that their employers add ESG options to plans. However, the legal exposure of ERISA fiduciaries who make ESG funds available to participants is unclear, and the case discussed here may be the first of many similar lawsuits.

The Department of Labor and the U.S. Supreme Court in its Hughes v. Northwestern University decision (142 S. Ct. 737) recognize that prudence is a facts and circumstances determination not to be reviewed with 20-20 hindsight. You might think that means that specific ESG investments that perform at least as well as competing investments with superior track records would be acceptable on plan investment menus, and under the Biden administration's ESG regulations, they would be.

However, politically-motivated lawsuits were filed earlier this year to invalidate the Biden administration's ESG regulations. The plaintiffs in these lawsuits don't even claim specific losses from having made ESG investments. After that, it seemed that it was only a matter of time before the first lawsuit against a corporate plan sponsor was filed. Now we have one. A new lawsuit targets American Airlines and aggressively challenges its 401(k) "ESG" investment offerings.

American Airlines was probably selected as a defendant for two reasons: 1. It sponsors very large plans; and 2. its headquarters are in Texas, allowing the suit to be filed in a jurisdiction with a track record of invalidating regulations issued during Democratic administrations. It is hard to see plaintiffs prevailing in any of these cases based on the statements in their complaints, though the district and appeals courts in Texas tend to go their own way on many issues. Here are some of the reasons plaintiff in the American Airlines case may...