Just when it appears that Environmental, Social, and Governance (ESG) might finally fade from the headlines, it resurfaces once again.
A few weeks ago, a federal judge out of the Northern District of Texas ruled in Spence v. American Airlines (AA), that the airline violated its “fiduciary duty of loyalty by letting asset manager BlackRock weigh environmental factors in 401(k) funds.” Throughout the 70-page ruling, several interesting, or even somewhat contradictory, claims are made that could have broader implications for defined contribution retirement plans.
In the decision, Judge Reed O’Connor criticized the choice to work with BlackRock (who is not a defendant in the suit) despite all funds managed by BlackRock for AA’s employees being index funds without sustainability focused investment objectives. These types of funds are designed to mirror market trends (like those in the S&P 500 and Nasdaq 100).
In fact, there was never any evidence suggesting the specific funds selected underperformed – which is typically required in these types of suits. Nonetheless, Judge O’Connor ruled against AA for violating its duty of loyalty, while simultaneously acknowledging its actions were prudent and exceeded industry standards in how it vetted and managed its asset manager.
Given this inconsistency, the ruling resembles more of a political statement than a legal one. Regardless, it opens the door to more anti-ESG efforts that could impact consumers at a time when many of these asset managers have been moving away from ESG anyway.
Whether it’s because of the new administration’s hostility to ESG, the lagging performance of the funds on a broad level, or general fatigue from fighting the issue the past several years, asset managers – and BlackRock in particular – have been publicly disassociating from ESG.
In both words and actions, BlackRock has been distancing itself from environmental and social investing practices. They, along with a handful of other banks and asset managers, have dropped out of Climate Action 100+, Net Zero Banking Alliance, Net Zero Asset Managers initiative, and other climate-based agreements. In doing so, BlackRock and these other institutions have made a point to reaffirm their commitment to their customers and fiduciary duties.
These steps appear to be enough to have satisfied lawmakers such as Texas Attorney General Ken Paxton, who recently dropped his longtime review of several of these financial institutions. He had been investigating many of them for allegedly boycotting oil, gas, and gun manufacturers, threatening to ban them from municipal bond deals in Texas. Similarly, the Comptroller of Texas, Glenn Hegar, announced that he would review whether BlackRock should remain blacklisted following their high-profile departure from the groups as well.
Not only is this court ruling untimely given the mass ESG retreat, but it also poses potential setbacks for defined contribution plans – such as 401(k)s or 403(b)s – by increasing the risk of litigation. Should that occur, these plans and managers could be limited in the funds they are able to invest in and be impacted by unnecessary litigation costs. Given that most consumers are invested in, and rely on, at least one of these defined contributions for their private sector retirement plans, this ruling could have far-reaching consequences – especially if it spurs copycat cases throughout the nation.
More generally, though, it seems this lawsuit and ruling is just another unnecessary battle in the ESG war that has largely already been won.
Nate Scherer is the Director of Finance Policy at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow on X @ConsumerPal.