An American Airlines pilot in Texas has sued his employer for what his complaint calls a “leftist” pension plan that favors progressive values over financial growth. Let’s break down this lawsuit and see if it has any merit.
American Airlines Pilot Lawsuit Seeks To Dismantle “Leftist” ESG Pension Goals
Bryan Spence is the lead plaintiff in a class action against lawsuit against American Airlines. His lawsuit claims that American Airlines is misappropriating the retirement savings of American Airlines pilots in order to “pursue leftist political agendas through environmental, social and governance.” Environmental, social and governance (ESG) investing is an investment strategy aimed at considering issues that may impact the long-term risk, growth, and sustainability beyond traditional considerations aimed purely on financials.
He claims that such stewardship contravenes the Employee Retirement Income Security Act (ERISA), which mandates a laser-focused fiduciary duty simply to maximize financial gain, not support progressive causes.
I will admit, I was quite skeptical seeing the headlines about this yesterday and figured the lawsuit probably lacked any merit. In fact, I figured it was probably not about the pilot or American Airlines at all, but a test case for exploring whether right-leaning courts will be willing to invalidate pension program schemes on the basis of prima facie language, as part of its broader investment goals, which values left-leaning initiatives.
But sometimes initial assumptions can be wrong, so I paid to download the 42-page complaint from PACER and read all of it (free free to read it here…I’ve uploaded it).
First, let me try to lay out the cause of action. Then, I will assess the likelihood of Spence succeeding on his claim.
Breaking Down The Complaint
Let’s start by dissecting the complaint.
The complaint starts with a quote from a recent Wall Street Journal editorial, which sets the tone for the pages to follow:
Many American workers don’t realize that their hard-earned money is being used against them. Firms whose job is to deliver investment returns are instead weaponizing retirement funds, public pensions and other investments in pursuit of nakedly ideological goals. It is perhaps the most severe breach of the fiduciary standard in American history.
Contrary to other reports, American Airlines’ investment in ESG is not called the most severe breach of fiduciary city in AA history, but the idea of using retirement funds and other investment vehicles to promote ideological goals is what is labeled the most severe breach in US history.
Spence contends that ERISA’s statutory guidelines mandate that the only valid concern a fiduciary has is financial growth:
“ERISA fiduciaries must act “solely in the interest of participants and beneficiaries and . . . for the exclusive purpose of providing benefits to participants and their beneficiaries.”
Since ESG policy goals preclude some companies and potential investment opportunities that do not meet certain standards, the lawsuit contends higher financial returns are needlessly sacrificed.
Two more points are made:
- ESG plans are more expensive for participants to own compared with similar non-ESG investment funds
- ESG plans underperform financially compared with similar non-ESG investment funds
The contention is that pilots would have made a whole lot more money had investments been made in non-ESG funds.
“Over the past five years, global ESG funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with a 8.9% return. This means an investor who puts $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared with $15,250 he would have earned if he had invested in the broader market.”
No evidence is provided for that, but such evidence is not required at this stage. By precluding certain investment options, the lawsuit contends that financials gains took a backseat.
ESG fund managers use portfolio screening as a process by which the fund manager reduces its universe of eligible investments based on non-pecuniary factors.
Why are returns lower for ESG funds? The lawsuit contends that “left-leaning” groups interfere with merit and performance, undermining outcomes:
“Depressed returns for ESG investing are predictable, given that the measures being pressed by left-leaning groups interfere with merit and performance standards, while contributing to lost opportunities.”
What are these left-leaning causes?
“[T]he most egregious examples of ESG policy mandates, on issues such as divesting in oil and gas stocks, banning plastics, requiring “net zero” emissions, and imposing “diversity’ quotas in hiring.”
The complaint talks of both defined-benefit contribution plans and 401(k) plans. My understanding that prior to its bankruptcy, American Airlines offered both options. Today, it offers only matching 401(k) plans.
“Even in a defined contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options. Hughes v. Northwestern Univ., 142 S. Ct. 737, 742 (2022)”
Standing would be questionable if there were only defined-benefit plans (which paid out a set amount each month, regardless of financial performance), but the current pension plans resembles a more traditional 401(k).
ERISA requires its fiduciaries to diversify investments (“by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.”)
The Fifth Circuit has held “fiduciaries must engage in a reasoned decision-making process for investigating the merits of each investment option and ensure that each one remains in the best interest of plan participants.” Schweitzer v. Inv. Comm. Of Phillips 66 Sav. Plan, 960 F.3d 190, 197 (5th Cir. 2020)
Defining “best interest” leaves much discretion.
Can a fiduciary consider other parties? No, but yes.
“Perhaps the most fundamental duty of a [fiduciary] is that he must display . . . complete loyalty to the interest of the beneficiary and must exclude all selfish interest and all consideration of the interests of third persons. Pegram v. Hendrich, 530 U.S. 211, 235 (2000)”
Complete loyalty to beneficiary may still include investing in vehicles with social aims that complement financial ones.
ERISA’s duty of loyalty mandates the pursuit of financial benefits for the plan participants and beneficiaries and does not allow for the pursuit of nonfinancial or nonmonetary benefits, even if plan participants and beneficiaries approve.
The question still is whether these ESG “non-financial or non-monetary benefits” are really non-financial or non-monetary. In other words, is there reasonable belief that such investments are ultimately aimed at maximizing shareholder return? Could these “leftist” causes ultimately be seen not as ends in themselves but an avenue to promote long-term financial sustainability and growth? And if so, on what timeline?
These are questions that must be wrestled with in this case.
The Problem With The Lawsuit
The problem for Spence is that American Airlines will proffer many experts of its own which argue that a diversified portfolio of investments is reasonable and that ESG investments are not simply about promoting social causes but investing in companies that are likely to fare better in the long-term due to being in front of the larger economic issues which will impact competition and profit from a macro perspective, especially as times goes on.
Of course that is debatable. But debatable is very different than clearly wrong.
Note what I bolded below:
To comply with its fiduciary duties, an ERISA plan manager must have the sole focus of pursuing the highest risk-adjusted financial return possible for plan participants and beneficiaries.
This is from the complaint. And this why the pilots will likely lose.
ERISA does have a clear fiduciary standard, but there is tremendous discretion in determining how to best maximize returns “solely in the interest of participants” and “for the exclusive purpose of providing benefits to participants and their beneficiaries.”
In an era in which the federal government and many state governments are pushing public policy promoting equity, is it really so unequivocally foolish to investment in companies that are going along with the Zeitgeist?
Without even opining on the wisdom of such policy, hedging your bet with investment vehicles which are better aligned with the trajectory of public policy seems like a reasonable investment decision, even if a regrettable reflection of the times.
CONCLUSION
I did not simply dismiss this lawsuit. Instead, I took the time to carefully read the complaint and consider the arguments. Even so, I do not predict ultimate success for this lawsuit (at least not on appeal). It strikes me as impossible to definitively prove that then or now ESG concerns are not reasonable as part of the calculus in how to maximize shareholder return.
TLDR: The pilots will likely lose.
You can read other takes from VFTW, PYOK, and OMAAT.
F this guy. In today’s world, a pension at all is pretty “leftist”. Let him cash out and start an IRA and he can invest in coal, typewriters, Polaroid, my pillow, and whatever other old school tech he wants
You know what’s leftist? Social security!
I agree with the TLDR. The pilots may be correct but not overwhelmingly so. As a result, they will lose or settle.
I doubt there’s a settlement to be had here
This guy is claiming unspecified damages, which would probably be impossible to accurately calculate even if he won.
Decent chance AA wins motion for summary judgment
I really don’t understand how wanting a more equitable and just world is such a bad thing. Those seem to be universal principles to me, but I guess that just makes me a “leftist” which is apparently bad.
To some, it also makes you “woke”…
Because, Einstein,
In the investment world, making money is the only goal. Go start a non profit if you want a land of ferries and unicorns
@ Derek. There are different approaches in the investment world. Some have an earlier return others require a bit more time, but are for the future return. And lol I would stay away from the land “ferries” ! 😉
I think there are investors out there that are willing to make lower margin investments in order to advance what they believe is positive societal change, though I do understand the point you are making, and for many, maximizing profit is their only concern. In this situation; however, I do not think that money is the plaintiff’s primary motive.
100% agreed!
Wanting a more equitable and just world is not a bad thing.
Individuals have a right to risk their hard earned money in any fund they wish. They are risking their money. Pension funds are not any one individuals monies, they are monies needed to support a group of people, employees of that company, from the day they retire until their, or their spouses, death. The impact of any loss of revenue, however slight, over time, can impact the financial security of thousands of people.
As for the 401(k) funds, most offer a menu of investment options to help balance your individual retirement account. And several of these issue based funds should be available as an option. Your 401(k) investment choices only impact your retirement or that of your spouse or beneficiary. Your 401(k) could be your way of influencing or supporting issues that matter to you.
What is an equitable and just world? A world in which a boy who was orphaned by his parents but grew up straight and white is displaced for promotion to a girl from a rich family? Who happens to be black?
@ Loretta Jackson
What is an equitable and just world is a very good question. And a very deep one.
As for a boy who was orphaned and adopted….. that is also a tough question. It is sad that a parent or parents made a decision to place their child for adopti0n as the best choice for their child. It is a blessing that a couple wanted and were able to adopt and love that child. Simply my opinion, but every child deserves love.
As for being “displaced” for a promotion. No matter what the reason, it is not good for the person who earned the promotion or those impacted by someone who is not the best candidate being promoted due to nepotism, country club connections, or any other reason not covered by EEO or morality.
All over the world, decisions are made that restrict or improve a persons quality of live. These decisions are based on political party affiliation (China), religious affiliation or sex (Iran / Afghanistan), or tribal heritage (Africa).
I am not condoning or making an excuse, simply pointing out that in some countries or cultures, biases are open and approved by those in control.
Question….. In your life time, do you believe you will see the EEO and Civil Rights laws we have in the United States become law in Afghanistan, Iran, China, or many other countries? And if not, how would you try to influence those countries to change?
This lawsuit is by another whining conservative who just can’t bear to see policies in place that might benefit society at large. Notice how the complaint doesn’t address the leftist Social Security and health insurance they will get for life. No mention how the GOP wants to gut all of it.
As for “woke” — Why can’t all the people who use “woke” agree on a definition… Ah, because it’s racist, sexist and homophobic that they really want to be.
The Democrats want to and have gutted Medicare. They keep cutting Medicare payments but are corrupt and cater to hospitals by paying them a facility fee for doctor’s office visits but only if the hospital owns the practice and not if a group of doctors or a single doctor owns the practice.
Democrats, don’t cut my Medicare.
HA, here are all the links to prominent Congressional Republicans proposing cutting Medicare. You can whine about the source being the White House, but the links point to the Republicans’ quotes and proposals:
https://www.whitehouse.gov/briefing-room/statements-releases/2023/02/09/fact-sheet-congressional-republicans-many-proposals-to-cut-social-security-and-medicare-and-increase-prescription-drug-prices-and-health-care-premiums/
Yeah, it’s very simple. You should be able to invest your money in causes you want. And he should be able to invest in causes he wants to.
He should not be able to control your money. And you shouldn’t be able to control his. Unfortunately, that is what you want, directly or indirectly.
If not, you agree with me, so don’t go in another hissy-fit, missy.
If the goal is to make the most money possible, you consider EVERY publicly traded company available. By doing anything less you are doing a disservice to your customers.
It doesn’t get any simpler than that.
What is an ESG stock and what isn’t one?
For example is Tesla an ESG stock since it is eliminating the use of gasoline and its pollution? Or isn’t it one since it is using a lot of hazardous chemicals in the battery and in other parts of the car and it still takes electricity and much of it is still generated via non-environmentally friendly methods?
I think it is more of a political thing than an investment thing.
What’s the point of using emotionally laden and partisan terminology like ‘leftist’ in a lawsuit? It’s not like there are no right-wing supporters of various bits of the ESG agenda, why not stick to the basic idea of ‘oil company shares were almost being given away in March 2020, you didn’t buy any because of your ESG obsession and we missed an once in a lifetime opportunity to secure some attractive dividends’?
The point is to trigger a Pavlovian response of outrage, despite huge swaths of conservative voters having no idea what “leftist!,” “Marxist!,” “socialist!,” or “woke!” even mean.
When you point out to them that EVERY single Southern state is run by Republicans, and EVERY one of them takes in more federal money than they pay in federal taxes — the very definition of socialism (“From each according to their ability to each according to their needs”) — their heads explode.
I saw someone call this an easy case but, acknowledging it’s outside my practice area, it’s probably as hard a case to prove as you’ll find in corporate litigation. Plenty of firms have lost fiduciary cases but every lost case I see was just straight up self dealing. Things like funding the pension with company stock with basically 0 diversification. It’s a preponderance of evidence and a reasonable man standard. Basically. anything resembling justification will work.
@Frank, that was my take as well. Regardless of left v right, the standard to judge this case is going to make it hard to prove that ESG funds have no reasonable expectation to outperform non-ESG, or that this is not a case of diversifying to spread risk, etc etc. That said, I have seen several cases recently that seemed to fly in the face of legal standard due to political leanings and jurisdictions.
Well, well, well…..looks like none other than the Harvard Business Review has called out the scam by pointing out the “inconvenient truth” that ESG investing HARMS INVESTORS!
It is virtue signaling at its worst by left-wing ideologues who failed Math 101 and are stealing money out of your pocket. The data don’t lie. Read the article for yourself:
https://hbr.org/2022/03/an-inconvenient-truth-about-esg-investing
Here’s a truth bomb: Socialism = pain, poverty, and misery.
He won’t win but he’s generally right. The market has responded with investment options that are ESG-free.
Your best chance of success long term is to own the market at the lowest cost possible… 3 stinking funds … is US total market, international total market and bonds. Active managed funds loose in the long term…. Yet they are still considered acceptable 401k choices? Just because I don’t want to gamble with my money doesn’t mean someone else shouldn’t be able to.. how is ESG any different. In a 401k, it’s a choice not a requirement.
Yeah, ESG isn’t the best thing for 401K AND this lawsuit is bogus.