Recent legal decisions have spotlighted the complex interplay between corporate fiduciary duties, Environmental, Social, and Governance (ESG) considerations in investment, and climate governance. The Spence v American Airlines Inc case, which considered the inclusion of ESG considerations in a 401(k) retirement plan, offers an important case study in balancing financial stewardship with long-term sustainable objectives.

The decision in context

The lawsuit was initiated by an American Airlines pilot on behalf of the 100,000 retirement plan participants. The plaintiff argued that American Airlines mismanaged its employees’ retirement plan under the Employee Retirement Income Security Act of 1974 (ERISA), 29 USC § 1001, et seq, when it employed BlackRock as an investment manager. The plaintiff claimed that BlackRock pursued “non-financial and nonpecuniary ESG policy goals through proxy voting and shareholder activism” and has an agenda that “covertly converts the [retirement] [p]lan’s core index portfolios to ESG funds” that harmed the financial interests of the retirement plan participants and beneficiaries by giving precedence to ESG considerations over the financial outcome of their investment decisions.

ERISA was passed to protect workers from the mismanagement of their retirement plans that could leave them with little to no savings by imposing a fiduciary duty on managers of retirement plans to “act with prudence, loyalty and disinterestedness”.

Judge Reed O’Connor of the US District Court for the Northern District of Texas concluded on January 10, 2025, that American Airlines had breached their duty of loyalty to act “solely in the retirement plan’s best financial interests” by allowing BlackRock to influence the management of the retirement plan with its ESG objectives, concluding:

“The facts here compellingly established fiduciary misconduct in the form of conflicts of interest and the failure to loyally act solely in the Plan’s best financial interests. BlackRock’s ESG influence is evident throughout administration of the Plan. The belief that ESG considerations confer a license to ignore pecuniary benefits is mistaken. ERISA does not permit a fiduciary to pursue a non-pecuniary interest no matter how noble it might view the aim.”

Conflicting regulations and case law create uncertainty in ESG investing

Of particular significance to the American Airlines ruling is Rule 2022 “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”, which amends the ERISA fiduciary duties of prudence and loyalty to clarify that retirement plan fiduciaries should consider ESG factors, including climate change, and their potential impacts on financial risks when considering the resilience of the portfolio. Specifically, § 2550.404a-1(4) has been revised to include: “A fiduciary’s determination with respect to an investment or investment course of action must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis [that] may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action.”

Moreover, if competing investments represent the same return and risk profiles that equally serve the best interests of the plan participants and beneficiaries, the 2022 Rule amends § 2550.404a-1(2) of ERISA to permit fiduciaries to consider collateral factors, such as ESG, in their decision-making.

Significantly, these amendments do not change the primacy of the duties of prudence and loyalty with regard to the financial interests of the participants and beneficiaries of the retirement plans they manage.

In State of Utah et al v Micone et al, 25 states, along with individual oilfield exploration concerns, challenged the 2022 Rule in the US District Court for the Northern District of Texas, arguing that the Rule went contrary to ERISA’s duty of loyalty requirement, that plan fiduciaries make their decisions based on the best pecuniary interests of the plan participants and beneficiaries. On February 14, 2025, the Court held that the 2022 Rule did not allow a fiduciary “to act for other interests than the beneficiaries’ or for other purposes than the beneficiaries’ financial benefit” and, thus, did not violate the duty of loyalty contained in ERISA.

The Court emphasizes that “[t]he 2022 Rule’s tiebreaking provision does not violate ERISA’s text because it never permits fiduciaries to deviate from exclusively achieving financial benefits for the beneficiaries alone”, but “[f]iduciaries should strenuously guard against letting impermissible considerations taint their decisions.”

Although the American Airlines case was specifically focused on ERISA and did not consider the 2022 Rule like the State of Utah et al v Micone et al case, they both raise questions on ERISA and the inclusion of ESG factors in retirement plan management. These cases were heard in the same district court, a month apart, and yet seem to sit in direct contrast to one another. This raises uncertainty on how ESG investing in retirement plans will be considered by US courts going forward.

It remains to be seen whether either case will be appealed to a higher court. The Securities and Exchange Commission (SEC) and the Department of Labor (DOL) may amend or supersede the 2022 Rule in the near future to align with the Trump administration’s deviation from climate-related rules and initiatives, which could render the decision in State of Utah et al v Micone et al irrelevant.

A battle of politics

Following the American Airlines judgment, Republican state officials sent a letter to the acting heads of the SEC and DOL asserting that “[a]llowing ESG activism to dictate investment decisions is inconsistent with ERISA’s mandate to act solely in the financial interests of beneficiaries,” and requesting that the SEC and DOL “uphold fiduciary duty laws and protect retirement plans” by issuing guidance on the fiduciary duties of retirement plan managers, introduce new rules that “reinforce and codify fiduciary obligations”, and increase oversight of ESG activities in retirement plan management with enforcement actions against those that deviate from their fiduciary duties.

In opposition to the Republican letter, Democratic officials submitted a letter of their own to the SEC and DOL urging them to “uphold their commitment to protecting the ability of fiduciaries to exercise their professional judgment in assessing long-term financial risks.” They argued that ESG factors were part of retirement plan fiduciaries to consider long-term material financial risks as part of a comprehensive risk evaluation requirement and that “[i]mposing artificial barriers that prevent investment professionals from considering material risks does not just undermine free markets—it jeopardizes the financial stability of hardworking Americans who rely on well-managed retirement plans.”

Climate governance outlook

The debate surrounding the American Airlines decision highlights the complexities of modern investment management where financial and environmental goals intersect. While some legal rulings have taken a strict view on fiduciary duties, others open the door to a more integrated approach that sees ESG factors as relevant to long-term financial performance. Both perspectives offer valuable insights, underscoring the need for balanced policies that can accommodate a diverse range of investor interests and societal goals.

As discussions continue, the evolving legal and regulatory landscape will likely shape how companies integrate ESG factors in retirement plans. Whether through judicial interpretation or legislative action, the ultimate aim of pension funds should remain the same: to protect the financial well-being of their participants and beneficiaries while contributing to a more sustainable and resilient economy.

The American Airlines judgment could have implications for Canadian pension funds, particularly in how they integrate ESG factors into investment decisions. While Canadian pension fund managers operate under a different legal framework—primarily governed by fiduciary duties under the Pension Benefits Standards Act, 1985 and provincial regulations—the case highlights potential legal risks associated with prioritising ESG considerations. Canadian pension funds, especially large public ones like the Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan, are actively involved in sustainable investing. However, increased scrutiny in the US could prompt Canadian regulators, trustees, and asset managers to re-evaluate how ESG is framed, ensuring that sustainability considerations are explicitly linked to long-term financial performance. Additionally, if similar legal challenges emerge in Canada, pension funds may need to further justify their ESG strategies within the scope of fiduciary duty to mitigate litigation risks.

The American Airlines ruling contributes to the intricacy in the already evolving and multifaceted area of climate governance. Traversing the developing legal landscape around climate-related financial risks and opportunities is a critical element of governance for boards and senior management. Understanding the key risks a pension plan faces—including from climate change and litigation—can have profound effects on the long-term operations and financial stability of that plan. Many businesses are refining their policy communications with carefully selected words. As they plan for the future, pension plans must stay attuned to the latest legal rulings.

This complex dynamic points to the need for clearer guidelines and regulatory frameworks. With ESG factors increasingly motivating the investment decisions of shareholders, legal experts, investment managers, and policymakers are calling for standards that reconcile fiduciary responsibilities with the pressing need for sustainable investment strategies.