American Airlines’ focus on ESG in 401(k) plan is illegal, US judge rules

By Daniel Wiessner

(Reuters) -A federal judge in Texas on Friday said American Airlines (NASDAQ:) violated federal law by basing investment decisions for its employee retirement plan on environmental, social and other non-financial factors.

The ruling by U.S. District Judge Reed O’Connor appeared to be the first of its kind amid growing backlash by conservatives to an uptick in socially-conscious investing.

O’Connor said American had breached its legal duty to make investment decisions based solely on the financial interests of 401(k) plan beneficiaries by allowing BlackRock (NYSE:), its asset manager and a major shareholder, to focus on environmental, social and corporate governance (ESG) factors.

“The evidence made clear that [American’s] incestuous relationship with BlackRock and its own corporate goals disloyally influenced administration of the Plan,” wrote O’Connor, an appointee of Republican former President George W. Bush.

The judge ruled after holding a four-day non-jury trial in June, in a class action by American pilot Bryan Spence on behalf of more than 100,000 participants in the retirement plan. O’Connor said he would decide later on whether class members suffered financial harms and American must pay them damages.

American said in a statement that it was reviewing the decision. Lawyers for Spence did not immediately respond to requests for comment.

BlackRock, which on Thursday said it was leaving an environmentally focused investor group under pressure from Republican politicians, is not involved in the lawsuit.

In November, BlackRock and two rival asset managers were sued by 11 Republican-led states who claim the firms violated federal antitrust law through climate activism that reduced coal production and caused energy costs to increase. BlackRock called the claims baseless.

Spence sued American in 2023, saying it had violated the federal Employee Retirement Income Security Act (ERISA) by failing to remain loyal to 401(k) plan participants and to prudently oversee their assets.

O’Connor last February rejected American’s claims that the lawsuit should be dismissed because Spence could not show that the 401(k) plan had underperformed, paving the way for a trial.

On Friday, the judge said that American had breached its duty of loyalty to retirement plan participants. But the company’s decisions did not violate its duty of prudence, O’Connor said, because it was acting according to prevailing industry standards.”

O’Connor is known for frequently ruling in favor of conservative litigants challenging laws and regulations governing guns, LGBTQ rights and healthcare.

The Biden administration in 2023 adopted a rule allowing 401(k) and other plans to consider ESG factors as a “tiebreaker” between financially equal investment options.

The rule replaced a regulation adopted during Republican President-elect Donald Trump’s first administration barring the consideration of any non-financial factors, which could be resurrected after Trump takes office for the second time later this month.

A Texas federal judge is currently considering a legal challenge to the Biden administration rule by 25 Republican-led states and oil drilling company Liberty Energy.