The 401(k) ruling against American Airlines for allegedly pursuing a "green" activism agenda is almost certain to add to the scrutiny facing ESG investment strategies.
A U.S. District Court judge in Texas said last week that the airline broke federal law by filling its 401(k) plan with funds from investment companies that pursue ESG goals. The decision is one of the first major legal victories for opponents of environmental, social and governance investing.
According to the judge, American Airlines violated the Employee Retirement Income Security Act's directive to act loyally and in the best interests of retirement-plan participants by hiring and keeping BlackRock to manage billions of dollars in plan assets despite its "ESG-oriented investing and proxy voting activism."
While the verdict is "a notable win for anti-ESG advocates," it poses "only modest pecuniary risk," Bloomberg Intelligence senior analysts Elliott Stein and Rob Du Boff wrote in a report.
"Anti-ESG sentiment will continue to drive litigation seeking to remove ESG considerations from investment decisions," the analysts said. "Though the lawsuits shine a light on ESG practices of asset managers like BlackRock, we don't think the financial fallout will be significant."
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BlackRock wasn't named as a defendant in the lawsuit, but the court's decision is an indirect attack against the asset manager, Stein and Du Boff said.
"The immediate effect is that other companies using BlackRock as a retirement-plan manager or offering its funds will need to scrutinize it more closely and more deliberately link ESG goals to financial performance, lest they also get sued," they said.
BlackRock also is the target in pending cases in Indiana, Mississippi and Tennessee for allegedly deceiving investors about its investment strategies.
"While we don't think the company's statements concerning ESG investing are necessarily inconsistent or rise to a level of deception," it's possible that BlackRock will face "modest, multimillion-dollar fines, though clarifying disclosures may suffice," Stein and Du Boff said.
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State pension funds also might opt to remove BlackRock as manager, as Indiana did in December, they said.
BlackRock said in a statement that it always acts "independently and with a singular focus on what's in the best financial interests of our clients. Our only agenda is maximizing returns for our clients, consistent with their choices."
