Employers Should Be Careful About ESG Investment Plans Covered By ERISA

Hunton’s hot topics site for spring 2024 featured an article on a recent opinion from a federal district court in Texas which suggests that employers should be cautious about ESG investment plans covered by the Employee Retirement Income Security Act, or ERISA. (ESG stands for Environmental Social Governance).

Retirement plans governed by the ERISA impose duties of loyalty and prudence on fiduciaries. That affects what plan managers evaluating investment options can consider other than risk-weighted returns.

In Spence v. American Airlines, Inc., the plaintiff alleged that his employer and its benefits committee violated prudence and loyalty duties by including funds “that are managed by investment managers that pursued non-financial and non-pecuniary ESG policy goals through proxy voting and shareholder activism.” The plaintiff cited studies finding that ESG investment plans underperformed returns of the broader market.

The defendants countered that the plaintiff provided no meaningful benchmark for performance. The court ruled that this was not required at the pleading stage “given the inherent fact questions such a comparison involves.” It added that the data provided on ESG investment plans established a record of under-performance which was sufficient.

The Court rejected other arguments by the plaintiff, and according to Hunton, sets a low bar for alleging ERISA claims based on alleged ESG investments. Besides the sufficiency of comparative under-performance, it allows the question of what constitutes an “ESG fund” to be based on public statements made by investment managers, regardless of whether those statements resulted in actions with respect to any funds at issue, or whether any actions actually caused investment under-performance. None of the funds held by the plaintiff were denominated as ESG funds.

Hunton suggests that retirement plan fiduciaries review investment plans with their investment managers to confirm that the traditional risk-return analysis supports their selections.