A Federal judge in the Northern District of Texas has ruled in favor of the plaintiffs in the ESG-focused case Spence v. American Airlines. The facts of the case are unique because American Airlines was not accused of improperly offering ESG-focused investment options (which many plans offer). Rather, it focused on American Airlines’ selection of BlackRock as an investment manager and its failure to monitor or attempt to influence BlackRock’s ESG-focused proxy voting.
The court took an unusual position in ruling that the fiduciary committee did not violate their duty of prudence in selecting BlackRock but did violate their duty of loyalty to the plan participants by failing to monitor BlackRock’s ESG-focused investment decisions.
The case is not over, as the judge has requested briefs from both sides to determine damages. If damages are minimal, it would suggest that while a breach of loyalty occurred, it did not result in significant financial loss to plan participants. On the other hand, if the damages are significant, a new spate of retirement lawsuits could begin, focused on any plan offering investments from any investment company that has utilized ESG considerations in its investment strategy or proxy voting.
The outcome will be interesting because it is not a settled principle that ESG investing results in lower investment returns. In fact, some would argue that investing in companies that pursue ESG goals could result in companies outperforming companies that do not pursue these goals, in the long-term.
Many retirement plans offer ESG-focused investment options within their plans and it is not clear how this decision could impact the use of those options. Despite the ruling, Multnomah Group’s recommendations as it relates to ESG investing remain the same:
- If you offer ESG-focused funds, we recommend against a lineup that is exclusively ESG-focused.
- We do not recommend the use of ESG-focused investments as the plan’s default option (QDIA).
These recommendations have remained consistent, even under the two very different Department of Labor ESG rules that were issued by the Trump and Biden administrations.
Multnomah Group will continue to monitor and update our recommendations as this politically charged issue continues to play itself out in retirement plan legislation and litigation.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.