American Airlines Faces Pilot’s Class Action For Mismanaging 401(k) Funds With ESG Goals
A class action lawsuit against American Airlines for violating its duties to employees over their 401(k) accounts can move forward. The suit argues that including ESG investment options violates fiduciary obligations, because they prioritize social change over financial returns.
The case revolves around the allegation that American Airlines—headquartered in Fort Worth, Texas—violated its fiduciary obligation to the Employee Retirement Income Security Act (ERISA) “by investing millions of dollars of American Airlines employees’ retirement savings with investment managers and investment funds that pursue political agendas” through ESG initiatives.
“By pursuing ESG goals, Defendants gave Plan assets to fund managers, such as BlackRock, who allegedly ignored financial returns as the exclusive purpose and lowered the value of Plan participants’ investments,” the order states.
Name plaintiff, Lt. Col. Bryan Spence, argues in the complaint that he’s lost money by investing his 401(k) dollars into suboptimal funds that American had a fiduciary obligation not to include, while those selections supported the airline’s carbon and DEI goals.
American Airlines has fiduciary obligations in selecting investment options for its employees, but it is the employees who choose what to invest in with their 401(k) dollars. This lawsuit is not about the market-based cash balance plan pilots can invest in where they do not make the investment selections.
I find this comic about ESG particularly interesting because it’s both offensively dismissive but also insightful into the cynical approach many companies take towards the issue. Delta Air Lines, for instance, claimed to go carbon neutral but was doing it by buying carbon credits – a dubious enough practice on its own – and some of those credits appear to have been fraudulent.
The problem with this anti-deforestation project was that there was too little deforestation. That seems good? For the climate? But bad for the people hawking carbon credits. The idealistic Muench pointed out the problem, and the now-jaded Heuberger was like “meh still fine”:
Sorry to hear that Scott. The Woke New World just can’t handle this kind of edgy humor. Do you have any other skills you can fall back on?https://t.co/HWmFqpxxuU pic.twitter.com/nR7B7c9Flq
— Chris (@JazzHandMeDowns) September 21, 2022
ESG funds necessarily earn lower rates of return. Any good investment that an ESG fund makes, a non-ESG fund can also make. ESG funds can’t make the good investments which go against their principles.
So what’s an ESG fund good for? Driving progress on social causes with dollars. The usual mechanism by which this works (note: this is not just virtue signaling!) is by lowering the cost of capital for ‘good’ companies (more investment, more money available and competition to make those funds available) and by raising the cost of capital for ‘bad’ companies (with marginally fewer dollars available to them). However, and this really shouldn’t be controversial:
- Social investing isn’t a free lunch. If you exclude high return investments from your portfolio that are inconsistent with your guidelines, you will have lower returns. It’s easy to confuse environmental companies delivering good returns – and even the sector outperforming others – with environmental investing not incurring tradeoffs. Non-ESG funds can invest in ESG projects because they are likely to yield strong returns! The only investments that ESG funds can invest in and non-ESG funds won’t are the ones with lower expected returns.
- ESG investing leads to higher returns for non-ESG investors. That’s by definition, since it leaves profitable opportunities on the table for others rather than competing down those returns. It’s the mathematical flip side of raising the cost of capital for companies you deem bad actors! You should be fine with that, but recognize both that you’re giving up returns and helping raise the returns for other investors who don’t share your philosophy.
- How many ESG funds actually short non-ESG companies? Most ESG funds do their work badly. If they were serious about raising the cost of capital for non-ESG projects shorting would be a necessary component of the strategy, and possibly even more effective.
- It can be possible to do more for environmental and social causes by earning more and donating rather than by imposing strict constraints on business activities. Giving up returns gives up the ability to invest in those causes.
There’s enough of an industry practice, enough industry experts who promote these funds, and enough historically strong performance in some of them that the claim the pension is in violation of ERISA law seems… implausible.
I believe it is admirable to invest with your principles, but you shouldn’t believe that you’re getting a free lunch by doing so. It’s admirable because it costs you something!
Oddly, the suit lists funds that ‘pursue ESG objectives’ and just include a laundry list of fund management companies without seeming to understand their investment strategies. They include AQR, for instance, on the ‘bad list’ when its principle is vocal on the tradeoffs involved in ESG investing and pursues strategies like shorts to both improve returns and ESG goals simultaneously though most ESG ratings do not know how to account for this. In other words, they pursue real investing over virtue-signaling even when taking some profit-maximizing opportunities off the table. The suit would probably do better to cite AQR’s own white papers rather than critiquing them.
Ultimately if there’s a case here it’s because of the complexity and ambiguity of ERISA law – offering industry-standard funds through a company like Fidelity is not, in itself, meeting a fiduciary obligation even though it probably should be. Similarly, allowing employees to pick funds which meet both their financial and non-financial goals should be permissible.
Most class actions represent a sort of greenmail, an attempt to extract a settlement. Getting a class certified is one step in obtaining a pecuniary reward. Here, though, the name plaintiff seems most interested in making a point about ESG and against the woke left and that seems entirely unlikely – a judgment on the merits against ESG investing, potentially upending the entirety of the retirement industry, seems exceptionally low probability.
