ESG Meets ERISA: Final Judgment Issued in American Airlines 401(k) ESG Lawsuit

Notably, the court did not determine or address over which time frame “pecuniary” factors are considered in its initial ruling, which is a key philosophical debate among ESG proponents and critics. Those who believe ESG factors should be considered in corporate decision making, believe that many of these considerations are either “pre-pecuniary” or may already be pecuniary in nature (but are hard to quantify), but only if one takes a longer-term view on financial return. For instance, taking steps to address or manage climate-related risks may not be financially accretive in the near term, but possibly could be prudent if one were to take a longer-term view on investment horizons. This key debate remains unresolved in the case and is likely to be an area for future litigation.

ESG objectives and fiduciary duties

The lawsuit, brought by an American Airlines pilot on behalf of participants and beneficiaries in the Plan, challenged the Plan’s retention of certain investment managers, notably a leading investment manager (the “Investment Manager”), on the grounds that such Investment Manager’s proxy voting and stewardship practices allegedly advanced its preferred ESG policy objectives rather than the pecuniary interests of Plan participants.

In rendering its decision, the court distinguished between ERISA’s two core fiduciary duties. On the one hand, the court held that Plan fiduciaries did not breach the duty of prudence, concluding that they acted in accordance with prevailing industry practices. The court recognized that fiduciaries “rarely, if ever” devote time to reviewing each investment manager’s proxy voting at a granular level.

On the other hand, the court held that the defendants had breached their duty of loyalty. The finding turned on evidence that the company’s significant commercial relationships with the Investment Manager improperly influenced the fiduciaries’ investment objectives. The court determined that the EBC was aware of the Investment Manager’s ESG‑related stewardship agenda yet did not separately evaluate whether such activities were aligned solely with the pecuniary interests of the Plan participants. In the court’s view, fiduciaries allowed non‑pecuniary corporate considerations and the outsized influence of the Investment Manager to affect Plan administration.

Notably, the Department of Labor’s stance on ERISA plans has shifted between recent presidential administrations. In 2020, the Department of Labor under the Trump administration adopted rules directing ERISA fiduciaries to base investment and proxy decisions only on pecuniary factors. In 2022, the Department of Labor under the Biden administration issued new rules that permitted the consideration of factors that a fiduciary reasonably determines are relevant to analyzing risks and returns, which could include ESG factors when relevant, and allowed their use as a limited tiebreaker. Under the 2020 rule, when two competing investments are economically indistinguishable, the tiebreaker standard allowed fiduciaries to turn to collateral factors (e.g., benefits other than investment returns), which erroneously suggested to some fiduciaries that they should be wary of considering ESG factors when analyzing financial returns. The 2022 rule modified the tiebreaker standard, instead allowing for fiduciaries to select investments based on a prudent conclusion that competing investments equally served the financial interests of the plan over the appropriate time horizon and clarifying that ESG factors can be considered where financially relevant to the investment decision. In 2025, the Department of Labor, once again under the Trump administration, ended its defense of the Biden-era rules and indicated an intent to rescind or replace the rules through further rulemaking.

The final judgment: No monetary damages, but injunctive relief granted

In the final judgment, the court determined that the plaintiff failed to sufficiently establish financial losses under the Plan caused by the challenged conduct and declined to award monetary damages to the class. Although not stated as a reason by the court in issuing its judgment, declining to award monetary damages likely dissuades future litigants from bringing similar class-action lawsuits where monetary recovery is the primary motivation. However, the court did enter injunctive and declaratory relief addressing the Plan’s governance and proxy‑voting oversight.

In particular, the court permanently enjoined the defendants by:

• Disallowing the company from permitting any proxy voting, shareholder proposals, or other stewardship activities on behalf of the Plan based on non-pecuniary objectives, including ESG-related objectives, that are not in the best financial interest of the Plan participants and beneficiaries, grounded in objective financial or empirical analysis;
• Requiring the company to hire and appoint two independent members of the EBC to serve for five years from the order. The independent members may not have any connection to the Investment Manager or other administrators, advisors or investment managers of Plan assets;
• Mandating that the EBC (or any successor groups) provide (i) annual written reports to each Plan participant identifying any financial transactions or relationships between the company and its administrators, advisors or investment managers of Plan assets; (ii) annual certification to each Plan participant that the EBC will only pursue investment objectives based on provable financial performance, and not based on diversity, equity and inclusion (“DEI”), ESG, sustainability or other non-pecuniary criteria (unless shown through financial or empirical analysis to be tied to pecuniary interests of Plan participants); and (iii) annual certification to each Plan participant that the EBC will only allow proxy votes to be cast on behalf of Plan participants solely to maximize long-term financial returns of the Plan participants’ investments, and not DEI, ESG, sustainability or other non-pecuniary criteria;
• Requiring the company to publish on its website information concerning the membership of the company and each administrator, advisor and investment manager of Plan assets in certain organizations devoted to achieving DEI, ESG, or climate-related objectives, including UN PRI, Net Zero Asset Managers Initiatives, and Ceres Investor Network; and
• Preventing the company from using the Investment Manager or any other significant shareholder (defined by the court as three percent or more ownership) or debtholder to manage Plan assets without policies in place to address this potential conflict.

We will continue monitoring developments regarding ESG and ERISA. Please reach out to your Vinson & Elkins team to discuss these matters and their implications for your business.