American Airlines Must Head to Trial Over ESG 401(k) Funds (1)

American Airlines Group Inc. must face a pilot’s claims that its 401(k) plan is loaded with investments geared toward “leftist political agendas,” using environmental, social, and corporate governance strategies, a judge ruled Thursday.

The class action covering as many as 100,000 participants in the American Airlines 401(k) plan is among the first lawsuits against a private company arguing that a plan sponsor breached its fiduciary duties by pursuing ESG investments at the expense of workers’ financial interests. The case now proceeds to a June 24 trial at the US District Court for the Northern District of Texas.

The trial will determine if American Airlines has violated its duties under federal benefits law and how much in losses it may have incurred through its plan investment selections, Judge Reed C. O’Connor said in the order denying American Airlines’ bid to toss the suit.

The lawsuit filed in June 2023 is the latest battle in a broader debate over socially conscious investing playing out in courts across the country, as well as among lawmakers. A decision on the validity of these investment strategies in 401(k)s would have ripple effects, particularly within the US Court of Appeals for the Fifth Circuit, where a case seeking to prevent enforcement of the Labor Department’s ESG-friendly 401(k) rule is pending.

The pilot’s Employee Retirement Income Security Act suit alleges that the American Airlines plan primarily features funds administered by firms like BlackRock Institutional Trust Company Inc., which pursue “pervasive ESG agendas,” O’Connor said in the order. But compared to other plan sponsors administering plans that featured BlackRock funds, American Airlines took “no action whatsoever” to mitigate the alleged losses, according to O’Connor.

American Airlines sought summary judgment on the participant’s claims, arguing that no losses resulted from the conduct in question and that the alleged fiduciary breach stemmed entirely from the plan sponsor’s failure to demand BlackRock change its proxy voting activity.

The airline and its benefits committee may also have allowed corporate ESG goals or stakeholder goals to influence the 401(k) by permitting plan investments to prioritize socially conscious objectives through proxy voting and shareholder activism, revealing potential conflicts of interest, according to the order.

“Furthermore, there are additional fact disputes surrounding Defendants’ incestuous relationship with BlackRock and whether that relationship disloyally influenced administration of the Plan,” O’Connor said in the order. “For instance, the person responsible for monitoring investment managers also managed the corporate financial relationship with BlackRock—an entity that administers the Plan while simultaneously holding a significant equity stake in AA.”

BlackRock’s ESG track record drew scrutiny from lawmakers in Texas and other states, which the judge highlighted as jurisdictions that “took action to stop ESG activism in retirement plans they oversee.”

BlackRock isn’t a party to the suit.

O’Melveny & Myers LLP and Kelly Hart & Hallman LLP represent American Airlines and its benefits committee. Hacker Stephens LLP and Sharp Law LLP represent Spence.

The case is Spence v. American Airlines Inc., N.D. Tex., No. 4:23-cv-00552, 6/20/24.