Just days after U.S. District Judge Reed O’Connor issued a decision against American Airlines for violating federal law by basing investment decisions for its employee retirement plan on ESG factors (see our blog here about that), legal analysts are warning that the precedent may be set for “a new wave of ESG-themed 401(k) lawsuits.” From Bloomberg Law:
“[Judge] O’Connor’s Jan. 10 ruling lays out an unconventional road map for suing US companies that have hired those same Wall Street firms to manage funds their workers use to build nest eggs. Together, BlackRock, State Street, and Vanguard oversee more than $5.4 trillion in US retirement assets, according to Bloomberg market share analytics. And all three have, at times, embraced proxy voting standards and external investment strategies with an eye toward environmental, social, and corporate governance goals… O’Connor’s final decision could unlock a new wave of ESG-themed 401(k) lawsuits – and motivate a higher-court appeal…
But the case still offers important lessons for plan fiduciaries. O’Connor’s emphasis on proxy voting oversight could spur retirement plan committees to take a careful look at what sort of documentation they receive from money managers about how proxy votes are determined and whether third-party service agreements accurately reflect participant interests…”
Others are less certain that more lawsuits will follow. Joshua Lichtenstein of Ropes & Gray is quoted in InvestmentNews:
“’The biggest question is: Are the damages large enough to make this type of claim appealing to the plaintiffs’ bar? While it’s clear this case is pretty politically motivated, those follow-up cases simply wouldn’t be.’
A single decision by a district-level court doesn’t necessarily mean there will be a deluge of successful cases brought on ESG within 401(k) plans, he said. And it’s impossible to know ahead of time the outcome of a potential appeal in the Fifth Circuit Court of Appeals, he said.”
While this case is about managing investment funds, an increase in ESG-themed litigation may have broader implications. The National Center for Public Policy Research (NCPPR) has filed several anti-DEI shareholder proposals arguing that DEI poses litigation, reputational and financial risks to companies, and therefore to shareholders. If O’Connor’s ruling spurs more anti-ESG/anti-DEI litigation for operating companies directly, NCPPR’s predictions may come true.
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