A U.S. district court judge has ruled that “environmental, social, and governance” (ESG) investing violates the fiduciary duty of pension plan managers since it is not based solely on maximizing returns and pensioners’ retirement security.

In a Jan. 10 order, U.S. District Judge Reed O’Connor concluded that “the facts compellingly demonstrated that Defendants breached their fiduciary duty by failing to loyally act solely in the retirement plan’s best financial interests by allowing their corporate interests, as well as BlackRock’s ESG interests, to influence management of the plan.”

The order was issued in response to a class-action lawsuit targeting American Airlines’ reliance on ESG-promoting firms in the management of employee pensions.

The complaint filed by pilot Bryan P. Spence stated, “Defendants have breached their fiduciary duties in violation of ERISA by investing millions of dollars of American Airlines employees’ retirement savings with investment managers and investment funds that pursue leftist political agendas through environmental, social, and governance (‘ESG’) strategies, proxy voting, and shareholder activism—activities which fail to satisfy these fiduciaries’ statutory duties to maximize financial benefits in the sole interest of the Plan participants. The unlawful decision to pursue unrelated policy goals over the financial health of the Plan is not only flatly inconsistent with Defendants’ fiduciary responsibilities, it jeopardizes the retirement security of hundreds of thousands of American Airlines employees.”

ERISA refers to the federal Employee Retirement Income Security Act.

O’Connor’s order noted that evidence and expert testimony presented at the trial showed an investment strategy “assumes an ESG label when it is aimed at, in whole or in part, bringing about certain types of societal change.” The judge noted that three criteria typically inform ESG investing, including environmental factors such as a company’s carbon footprint and whether toxic chemicals are involved in manufacturing processes; social factors including how a company addresses LGBTQ+ interests or embraces “diversity, equity, and inclusion” (DEI) programs and hiring practices; and governance factors.

“By focusing on non-pecuniary interests, ESG investments often underperform traditional investments by approximately 10%,” O’Connor wrote. “For instance, when compared to the S&P 500 and the Russell 1000 indices in 2023, ESG funds dramatically underperformed non-ESG funds, with ESG-related funds returning about 8% compared to about 14% for both indices.”

O’Connor noted that Blackrock, which has contracts to manage numerous pension funds’ assets, has an extensive history of vocal activism in support of ESG investing, although the company changed its rhetoric once state governments began blacklisting ESG firms from management of state pension assets.

O’Connor noted that Blackrock’s February 2024 announcement that it was leaving Climate Action 100+ because it conflicted with United States law requiring money managers to act solely in their clients’ long-term economic interests was “essentially a confession that its involvement in that particular initiative and related pursuits did the opposite.”

O’Connor noted that Blackrock often “couched its ESG investing in language that superficially pledged allegiance to an economic interest,” but that the firm “never gave more than lip service to show how its actions were actually economically advantageous to its clients” [emphasis in original].

“Absent a cognizable basis for claiming that certain ESG considerations capture material financial risks, slapping the label ‘financial interest’ serves as mere pretext,” O’Connor wrote.

The judge wrote that BlackRock’s public statements “made clear that financial interests did not exclusively drive their aims.”

O’Connor also concluded that American Airlines “did not sufficiently monitor, evaluate, and address the potential impact of BlackRock’s non-pecuniary ESG investing,” which constituted a “breach of loyalty” to employees relying on the company’s pension system.

“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,” O’Connor wrote. “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. Plaintiff therefore proved by a preponderance of the evidence that American disloyally acted with an intent to benefit a party other than Plan participants and in a manner that was not wholly focused on the best financial benefit to the Plan.”

The decision in the American Airlines case could have repercussions in Oklahoma.

In 2022, Oklahoma lawmakers passed the “Energy Discrimination Elimination Act” (EDEA), which requires the office of the state treasurer to identify firms that boycott investments in oil-and-gas companies due to those firms’ embrace of ESG policies.

State entities, including state pension funds, cannot contract with firms on that list.

Oklahoma legislators passed the law because ESG firms seek to deprive oil-and-gas companies of access to capital and those firms are the foundation of the state economy. In addition, lawmakers noted that ESG policies produce lower investment returns for workers depending on state retirement systems.

Oklahoma’s “Energy Discrimination Elimination Act” is currently tied up in court.

A lawsuit challenging the “Energy Discrimination Elimination Act” has resulted in a temporary injunction that keeps it from being enforced. The plaintiff in that case argued his state pension benefits could be harmed if Oklahoma pensions do not invest in the funds targeted by the law—those that prioritize ESG policies.

However, research continues to show the pensioner in the Oklahoma case is likely better off with the “Energy Discrimination Elimination Act” in place than without it, including a study released by the American Energy Institute and a study co-authored by two Oklahoma Council of Public Affairs experts that found ESG investing violates the fiduciary duty of state pension asset managers, is based on unreliable and inconsistent ratings, and indirectly supports attacks on key Oklahoma industries such as oil and gas.