In response to a motion to dismiss his suit regarding ESG investments—and ESG-friendly investment managers—in his 401(k), an American Airlines participant has expanded the information in his initial suit—and contradicted the claims of the plan fiduciaries.
Participant-plaintiff (and pilot) Bryan P. Spence[i] filed suit in the U.S. District Court for the Northern District of Texas in June against Defendants American Airlines, Inc., American Airlines Employee Benefits Committee, Fidelity Investments Institutional, and Financial Engines Advisors, LLC (he subsequently dropped the latter two), alleging that they “breached their fiduciary duties in violation of ERISA by investing millions of dollars of American Airlines employees’ retirement savings with investment managers and investment funds that pursue leftist political agendas through environmental, social and governance (‘ESG’) strategies, proxy voting, and shareholder activism—activities which fail to satisfy these fiduciaries’ statutory duties to maximize financial benefits in the sole interest of the Plan participants.” The suit had also challenged “the unlawful decision to pursue unrelated policy goals over the financial health of the Plan.”
More specifically, the suit alleged “Defendants have selected and included as investment options numerous investment funds that pursue ESG policy goals through their investment strategies, proxy voting, and shareholder activism... and many of the ESG funds that Defendants have included in the Plan are more expensive for Plan participants to own compared with similar non-ESG investment funds, underperform financially compared with similar non-ESG investment funds, and engage in shareholder activism to achieve ESG policy agendas rather than maximize the risk-adjusted financial returns for Plan participants.”
The amended complaint reiterates that the American Airlines defendants have also “selected and included as investment options funds that are managed by investment companies that pursue ESG policy agendas through proxy voting and shareholder activism. Many of these funds are not branded or marketed as ESG funds; however, the actions of their investment advisors and managers give rise to the same ERISA violations as those funds that do market themselves as ESG funds.”
In early August, American Airlines pushed back on those allegations—essentially arguing in a motion to dismiss that Spence hadn’t been invested in any of the funds in question, and thus, suffered no injury and had no standing to bring suit.
Updated Claims
The amended complaint (Spence v. American Airlines Inc. et al., case number 4:23-cv-00552, in the U.S. District Court for the Northern District of Texas) states that “Defendants have included these funds not because of their duty to participants and beneficiaries but because of their own agreement and alignment with ESG objectives. Defendants have violated ERISA by selecting and retaining funds that pursue nonfinancial or nonpecuniary objectives like ESG social policy objectives, rather than investment funds that have the exclusive purpose of maximizing financial returns for investors.” It continues to allege that the American Airlines defendants “have also breached their fiduciary duties of prudence to the Plan and Plan participants by selecting and retaining poorly performing and more expensive ESG funds as investment options, and by failing to investigate and monitor the fund managers’ proxy voting and shareholder activism.”
In the amended complaint, the plaintiff directly contradicts the earlier response by American Airlines, claiming that he does, in fact, have investment/interest in several of the funds in question, specifically about 37% in a Target Date 2045, as well as a number of other mutual funds managed by BlackRock. Further, while there are multiple managers/funds comprising the TDF in which the plaintiff is invested, BlackRock seems to predominate, at least according to a table provided, though no data is provided with regard to specific losses by the plan or the plaintiff. Not surprisingly then, articles regarding BlackRock’s public positions on ESG, as well as those of BlackRock CEO Larry Fink, come in for special criticism. He notes that “BlackRock’s engagement strategy, in which a ‘net zero’ climate agenda is a significant or main consideration, covertly converts the Plan’s core index portfolios to ESG funds.”
But he also comments that he has investment(s) in funds managed by American Beacon Advisors, Inc.; TCW Group; Loomis, Sayles & Company, LP; T. Rowe Price; Artisan Partners; Thompson, Siegel & Walmsley LLC; Morgan Stanley Investment Management; and State Street—all of which he claims are unduly influenced by—and influencing by their proxy voting records—an ESG focus.
He cited the suit earlier this year by 25 state attorneys general,[ii] and comments that “BlackRock’s ESG activism threatens Plaintiff’s and the other Plan participants’ investment returns, which depend on the energy sector. The companies that BlackRock targets are crucial to Plaintiff’s and the Plan participants’ investment returns.”
‘Fully Committed’
He also argues that American Airlines itself is “fully committed” to ESG principles, citing statements from the firm’s annual ESG report. The suit also claims that in 2021 American Airlines was the only passenger airline included in the Dow Jones Sustainability North America Index, and that the airline “supports the United Nation’s Global Compact’s Ten Principles, and its ‘ESG efforts are integral to meeting that commitment.’”
He further claims that “over the past five years, global ESG funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with an 8.9% return.”
He notes that “…mutual funds that track ESG indexes will typically charge significantly higher fees than funds that track the more standardized and broadly based market indexes. Therefore, offering ESG funds may be significantly more profitable for the investment adviser than lower-cost funds that use standardized indexes.” The suit also states that “an ERISA plan manager is not acting solely in the interests of the plan participants and beneficiaries, and is breaching its duty of loyalty, if it uses an ESG investment strategy or offers a selection of funds to self-directed individual accounts that utilize an ESG strategy.”
‘An ESG Agenda’
“Defendants have included funds in the Plan that are managed by investment managers that pursue nonfinancial and nonpecuniary ESG policy goals through proxy voting and shareholder activism,” the suit alleges. “These investment managers have voted for many of the most egregious examples of ESG policy mandates, on issues such as divesting in oil and gas stocks, banning plastics, and requiring ‘net zero’ emissions, which do not contribute to the company’s profitability or increasing shareholders’ returns. None of the proposals were supported by management at the targeted companies, and the investment managers’ votes were typically made without the approval, or even the awareness, of Plan participants.”
“Through proxy voting, many of these investment management companies prioritize their political biases and ESG priorities over financial performance,” the amended suit alleges. “The fund managers pursue an ESG agenda by voting the shares of their clients—including ERISA plan participants—on ESG proposals advanced primarily by liberal activist groups which do not seek to maximize profits or shareholder returns. In other words, investment managers are buying their voting power with other people’s money, yet investment managers are using that power in a way that is at odds with both the benefit of these shareholders and their preferences.”
Citing the U.S. Supreme Court’s decision in Hughes v. Northwestern, the suit states, “If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”
“Defendants did not independently evaluate these investment managers before including funds that they manage as investment options under the Plan, did not independently monitor them once in the Plan, and did not remove funds managed by these companies from the Plan. An ERISA fiduciary focused solely on the financial interests of Plan participants would have avoided offering investment options that are managed by these investment managers,” the suit claims, going on to note that “defendants have also selected and included a number of ESG funds as investment options offered to Plan participants through the SDBA option”—although the suit states that other investments were blocked from consideration in the SDBA option. As for that option, the suit comments that “The existence of an SDBA option does not excuse plan fiduciaries from constructing and maintaining a prudent and appropriate menu of designated investment alternatives.”
Stay tuned.
[i] The proposed class is represented by Andrew B. Stephens and Heather G. Hacker of Hacker Stephens LLP and by Rex A. Sharp of Sharp Law LLP.
[ii] The coalition, led by Texas Attorney General Paxton, said in a January 2023 press release that the 2022 Rule “undermines key protections for retirement savings of 152 million workers—approximately two-thirds of the U.S. adult population and totaling $12 trillion in assets—in the name of promoting environmental, social, and governance (‘ESG’) factors in investing, including the Biden Administration’s stated desire to address climate change.”
