Texas ESG Court Decision

In a recently released decision from the District Court for the Northern District of Texas, the judge decided that a retirement plan sponsored by American Airlines breached their fiduciary duty of loyalty by investing retirement plan dollars with investment managers and funds that pursued investments based on environmental, social and governance (ESG) factors.  The court found that the plan allowed corporate interests and the interests of their investment managers to influence the plan’s management.  The court, however, found that these actions did not amount to a breach of the plan sponsor’s duty of prudence/

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the Texas court’s finding that a retirement plan’s sponsors violated their duty of loyalty by allowing firms with ESG objectives to manage the plan’s funds.

Below is a summary of the debate that ensued between the two professors.

Their Votes:





Their Reasons:

Byrnes: Allowing retirement plan fiduciaries to focus on things like ESG investing with plan assets is a dangerous proposition--and one that I think will be more clearly prohibited under the Trump administration's DOL.  Unfortunately, ESG investing often coerces retirement plan participants to support progressive ideas that they might not have any real desire to support.  It makes complete sense that the courts should seek to limit that ability.

Bloink: The court found that the plan in this case violated their duty of loyalty merely because Blackrock does consider ESG factors in making its investment decisions.  I can't agree with that conclusion.  ESG investing is socially responsible, of course, but that's not really what all the controversy is about.  Investing in companies with strong environmental, social and governance positions is also often a smart move financially--especially when investing with an eye toward a changing future.

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Byrnes: Plan fiduciaries should be focused solely on maximizing the value of financial returns--it's their obligation to do everything they can to secure plan participants' retirement assets.  Non-pecuniary factors should only be considered when choosing investment options in situations where all other financial factors are equal--and we need a system where investors are able to control the "causes" they support.  Here, the sponsors put their own interests first and the court correctly recognized the impropriety of that fact.

Bloink: Plan fiduciaries should be permitted to consider every investment option as a whole--limiting consideration of ESG factors makes very little sense given their importance over time.  The court in this decision acknowledged that the defendants acted in accordance with prevailing industry standards, so could not be found to violate their duty of prudent investment management.  The court acknowledged that the defendants acted with the required attention to evaluating, reviewing and monitoring the plan’s investment.  There is no reason to believe that ESG factors should not be considered in maximizing the plan’s financial returns.

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Byrnes: The problem is that the sole focus should be on maximizing the plan’s financial returns.  The leftist political agenda should play absolutely no role in the investment management of individual retirement funds.  In this case, the plan sponsors let their own political agendas impact their financial decisions—something that is always going to violate the plan sponsor’s critical duty to act in the sole financial interests of plan participants.

Bloink: ESG factors can actually increase the odds that an investment will perform well over time--especially in this changing world.  We can’t ignore that fact, which has been confirmed time and again with the passage of time.  The government and courts should seek to encourage this type of responsible investing.  Court decisions like this Texas court’s merely serve to scare fiduciaries into avoiding potentially successful ESG investments altogether for fear of this type of blanket fiduciary liability.