A federal judge in Texas has ruled that American Airlines breached federal law by allowing environmental, social, and other non-financial considerations to influence investment decisions for its employee retirement plan.
US District Judge Reed O’Connor concluded that American Airlines violated its legal duty under the Employee Retirement Income Security Act (ERISA) by failing to prioritise the financial interests of 401(k) plan participants. The airline’s reliance on asset manager BlackRock to integrate ESG factors was deemed inappropriate.
In his ruling, O’Connor criticised what he described as an “incestuous relationship” between American Airlines and BlackRock, stating that their corporate goals disloyally influenced the retirement plan’s administration. O’Connor, an appointee of former Republican President George W. Bush, issued the decision after a four-day non-jury trial in June.
The lawsuit, filed by American Airlines pilot Bryan Spence on behalf of more than 100,000 retirement plan participants, alleged that the company breached its fiduciary duty to act solely in the best interests of its employees. The court will later decide whether participants suffered financial harm and if American Airlines must pay damages.
While Judge O’Connor ruled that the company violated its duty of loyalty, he found that its actions did not breach its duty of prudence because they aligned with industry standards.
American Airlines stated that it is reviewing the decision. Lawyers for Spence have not yet commented. BlackRock, which is not a party to the lawsuit, recently announced its exit from an environmentally focused investor coalition amid pressure from Republican politicians.
The ruling comes amid increasing scrutiny of ESG investing. In November, BlackRock and two rival asset managers were sued by 11 Republican-led states, accusing them of using climate activism to reduce coal production and increase energy costs. BlackRock has dismissed these claims as baseless.
Additionally, the Biden administration in 2023 adopted a rule allowing 401(k) plans to consider ESG factors as a “tiebreaker” between financially equivalent investment options. This regulation replaced a Trump-era rule barring the use of non-financial factors, but the Biden rule now faces legal challenges from 25 Republican-led states and Liberty Energy, an oil drilling company.
Judge O’Connor is known for rulings favouring conservative challenges on issues such as healthcare, LGBTQ rights, and gun control. His decision against American Airlines underscores the legal complexities of balancing ESG considerations with fiduciary duties in retirement plans.
