Judge Restricts ESG Influence in American Airlines Case

 A federal judge restricted the influence of environmental, social and governance considerations in American Airlines’ 401(k) plan in a district court ruling but stopped short of awarding the plaintiffs monetary damages.  

In Spence v. American Airlines Inc., et al, decided in U.S. District Court for the Northern District of Texas, U.S. District Judge Reed O’Connor ruled that American Airlines was liable for fiduciary misconduct and had breached its duty of loyalty under the Employee Retirement Income Security Act by allowing BlackRock’s pursuit of ESG factors to influence the core index portfolios within the retirement plan, rather than acting solely in the plan’s best financial interest. 

However, O’Connor stopped short of finding American Airlines had breached its duty of prudence, because it acted “in accordance with prevailing industry practices, which was fatal to plaintiff’s breach of prudence claim.” Further, O’Connor ruled that the plaintiffs failed to establish monetary losses to the plan; therefore, they were not awarded monetary damages.  

Instead, O’Connor ruled that American Airlines must act as follows:  

• American Airlines must not allow for any proxy voting, shareholder proposals or stewardship activities for the plan that are motivated by nonfinancial goals, such as ESG investing; 

• American Airlines must appoint at least two independent members to its employee benefits committee for five years, ensuring these members have no connections to BlackRock, Aon or any administrator, adviser or investment manager related to the plan; 

• American Airlines will certify in writing to each plan participant that its committee, administrators, advisers and investment managers will only pursue investment objectives based on “provable financial performance”; 

• American Airlines will maintain accessible information on its website regarding its membership in and affiliation with organizations focused on diversity, equity and inclusion; ESG factors; and climate investments. This site will link to membership terms and will be subject to review by the independent committee members for compliance; and 

• American Airlines is prohibited from using BlackRock or any other major shareholder of the airline to manage plan assets unless policies are in place to prevent individuals with corporate ties to the asset manager from being involved in plan fiduciary roles or management. 

The case was originally filed in June 2023, and O’Connor previously ruled in January that the airline failed to protect its participants because of its ESG considerations. 

Under former President Joe Biden, the Department of Labor had an ESG rule that retirement plan fiduciaries were not required to consider ESG factors when selecting investments, but were permitted to use ESG considerations as a “tiebreaker” when two options offer equivalent return rates. 

In May, under President Donald Trump, the DOL announced it would craft a new ESG rule.