[Ed. note: Due to a minor oversight, a blog email was sent out this past Sunday. This was inadvertent and doesn’t indicate a change in our normal blog schedule. If you missed, it, you can see it here.]
Last week, ESG took a legal hit in investment management. From Reuters:
“A federal judge in Texas on Friday said American Airlines 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, its asset manager and a major shareholder, to focus on environmental, social and corporate governance (ESG) factors.”
Judge O’Connor added a twist by saying that American
“… acted according to prevailing industry practices, even if leaders in the fiduciary industry contrived to set the standard. This is fatal to Plaintiff’s breach of prudence claim. Accordingly, Plaintiff prevails on the merits of his breach of loyalty claim but not on the breach of prudence claim.”
The decision details how American managed their employees retirement plan, which involved a heavy reliance on external advisors and little oversight of those advisors. Pages 20-24 contain a synopsis of how the Employee Benefits Committee (EBC) operated. The judge criticized the process, but pointed out that it didn’t go against principles of prudence because it was “consistent with and, in many respects exceeded, the processes of other fiduciaries.”
The ruling is valuable reading – even if you disagree with the findings and decision. American hasn’t publicly announced if they will appeal or take other action.
ESG/sustainability leaders, staff and advisors – This decision is likely to repeat itself in the courts in the near- to mid-term, with companies and advisors adjusting their strategies and governance processes accordingly. Given that, here’s the most important excerpt that impacts how you should think and function:
“Investing that aims to reduce material risks or increase return for the exclusive purpose of obtaining a financial benefit is not ESG investing. Consideration of material risk-and-return factors is no different than the standard investing process when both are focused on financial ends… ESG investing is a strategy that considers or pursues a non-pecuniary interest as an end itself rather than as a means to some financial end. This distinction is especially key in this case. Simply describing an ESG consideration as a material financial consideration is not enough. There must be a sound basis for characterizing something as a financial benefit.”
Members can read more about ESG materiality here.
If you aren’t already subscribed to our complimentary ESG blog, sign up here for daily updates delivered right to you.
Photo credit: Cerib – stock.adobe.com
