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What the Recent American Airlines Ruling Means for ESG in Defined Contribution Plans

Owen Ramsay, CPFA – Retirement Advisor & Counselor
March 2025

In a case that has received significant attention at the intersection of corporate governance, ESG (Environmental, Social, and Governance) investing, and fiduciary responsibility, Spence v. American Airlines, Inc. has raised critical questions about how retirement plan assets should be managed, particularly when those assets are influenced by factors beyond purely financial considerations.

Background

Spence v. American Airlines, Inc. is a class action lawsuit filed against American Airlines in the Northern District of Texas. The plaintiff, Bryan Spence, an employee of American Airlines, alleged that the airline violated its fiduciary duties of prudence and loyalty under the Employee Retirement Income Security Act (ERISA).

Spence claims that the airline’s plan fiduciaries allowed one of its investment managers to pursue non-financial, or “non-pecuniary,” goals via proxy voting and shareholder activism through their passively managed index funds. Notably, the investment manager’s index funds were not explicitly designated as ESG funds; they were standard index funds. However, the lawsuit argues that the investment manager’s broader ESG-driven initiatives, such as climate change activism, effectively transformed the plan’s core index portfolios into ESG funds, influencing decisions not aligned with the financial interests of plan participants.

The Courts Ruling

The court’s ruling addressed the two central fiduciary duties under ERISA: the duty of prudence and the duty of loyalty.

  • No Breach of Duty of Prudence: Judge O’Connor ruled that the plan fiduciaries did not violate their duty of prudence. This duty requires fiduciaries to act with the care, skill, and diligence that a prudent person would exercise in designing and implementing processes for monitoring the plan. The judge acknowledged that the fiduciaries followed practices consistent with industry standards for selecting and retaining investment managers and overseeing proxy voting. Regarding the evaluation and monitoring of the plan’s investment managers, the American Airlines Employee Benefits Committee (EBC) held regular fiduciary review meetings and engaged both internal and external experts, including outside investment consultants. In terms of proxy voting, Judge O’Connor noted that fiduciary committees “rarely, if ever, devote committee time or focus on independently reviewing an investment manager’s overall proxy voting practices.” Therefore, the court determined that the plan fiduciaries maintained a prudent process and that any gaps in monitoring the investment managers’ proxy voting activities aligned with standard industry practices.
  • Breach of Duty of Loyalty: Judge O’Connor concluded that American Airlines’ fiduciaries breached their duty of loyalty under ERISA by failing to act solely in the retirement plan’s best financial interest. This duty requires fiduciaries to remain free from outside influence and to prioritize the interests of plan participants above all else. The court found that the investment manager’s extensive corporate relationship with American Airlines exerted undue influence over the plan’s management. Key factors cited in the ruling included:
    • The investment manager was one of American Airline’s largest shareholders (5% ownership of American Airlines stock).
    • The investment manager was the plan’s largest investment manager at the time.
    • The investment manager financed approximately $400 million of American Airlines’ corporate debt during a period of financial difficulty.

The court ultimately ruled that American Airlines had “value in appeasing the investment manager” and “downplayed or failed to appreciate the power and influence the investment manager wields over the plan,” leading to a failure to maintain the necessary separation between corporate and fiduciary duties.

The Spence v. American Airlines case is noteworthy not only for its direct implications for American Airlines but also for the broader legal landscape. The case was filed in the Northern District of Texas, which has been the venue for several high-profile lawsuits challenging federal regulations, particularly in the post-Chevron deference era. Chevron deference, a principle that directed courts to defer to federal agencies’ interpretations of ambiguous laws, has seen a shift in recent years, with courts increasingly taking a more active role in statutory interpretation. This shift could significantly influence how future cases involving ESG investing are decided.

Furthermore, the case contributes to the ongoing national debate over the role of ESG factors in investment strategies, particularly for institutional investors and fiduciaries managing retirement plans. While ESG investing has gained prominence with the growing emphasis on sustainability, the ruling raises the question of whether ESG considerations can be justified when they are not explicitly aligned with the primary objective of maximizing financial returns.

Conclusion

The Spence v. American Airlines case marks a significant moment in the legal landscape surrounding fiduciary duties, ESG investing, and corporate governance, especially in light of a recent administration change historically averse to ESG investments. While the court’s ruling emphasizes the importance of ensuring fiduciaries act in the best financial interests of plan participants, it also underscores the challenges in managing the growing influence of ESG principles within investment strategies.

While the future of ESG investments within ERISA retirement plans remains unclear, the 2022 ESG Rule is still in effect. The case reinforces the principle that fiduciaries must act solely in the best financial interests of the plan and its participants, and ESG considerations must align with this duty as outlined in the 2022 DOL ESG Rule.

It is important to note that the trial court’s findings are specific to the facts and circumstances of this case and do not establish a national standard. Other courts may adopt similar analyses, but interpretations could vary across jurisdictions, leading to potential differences in future rulings.

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Sources/Notes

https://climatecasechart.com/case/spence-v-american-airlines-inc/
https://www.asppa-net.org/news/2025/2/federal-judge-reaffirms-2022-esg-rule/

This document is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy, and does not purport to be a complete analysis of the material discussed.

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