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American Airlines is navigating a turbulent time after a court certified a pilot’s lawsuit against the company over its socially conscious 401-k investments as Class Action.
The ruling, made on May 23, relates to a suit in which pilot Bryan Spence says the airline’s $26billion 401(k) plan improperly favored environmental, social, and governance (ESG) related funds.
Spence claims the investment decision was “imprudent” because it is “well known that ESG funds are associated with poor performance given the detrimental effects of such activism on stock prices.”
As a Class Action suit, American Airlines may subsequently be forced to pay damages to as many as 100,000 people, depending on the verdict.
“Class certification is natural in this ERISA case,” Judge O’Connor stated. “There are more than 100,000 Plan participants and beneficiaries allegedly injured by Defendants’ unlawful, Plan-wide misconduct.”
According to Bloomberg Law, it’s one of the first private-sector lawsuits of its kind to argue that a company’s retirement plan potentially negatively impacted staff by pursuing ESG investments above worker interests.
O’Connor earlier ruled in February that the case could proceed with fiduciary disloyalty and imprudence claims under the Employee Retirement Income Security Act.
However, approving this as a class action lawsuit brings even greater weight to a cautionary about how employers deliver on their ESG goals.
O’Connor ruled the airline’s “public commitment to ESG initiatives” led it to invest assets from its $26billion 401(k) plan into ESG funds without investigating non-socially conscious funds that may have maximized financial returns for American Airlines employees.
While the case is still ongoing, this unchartered territory shows that employers must be careful in how they translate ESG commitments into company policy.
Employers struggle as pressure for public ESG commitment mounts
The pressure is on for companies to show they have implemented policies and practices that reflect values of environmental and social responsibility.
A survey from the Net Positive Employee Barometer, for example, finds that 51% of American workers would contemplate leaving their jobs if their company's environmental actions did not align with their values. Remarkably, 35% claim they have already done so.
This pressure is also hindering employers in the job market, particularly when it comes to attracting younger talent. One in three 18- to 24-year-olds have reportedly rejected job offers based on a company's ESG record, a 2023 KPMG study found.
Some employers have taken this pressure as a sign to implement workplace policies ranging from tying ESG target progress to employee bonus schemes to offering subsidized eco-friendly transport. According to McKinsey, around one in five employers say they are addressing ESG concerns to retain, attract, or motivate employees.
Whatever the fate of the Spence v. American Airlines lawsuit, employers should heed the lesson that where ESG-friendly policies are concerned, not all areas of the business are appropriate to rework – including, it seems, the investment of 401(k) funds.
Indeed, while green perks are increasingly popular, employers should be wary that not all workers would welcome policies that place environmental interests above their own.
Pilot Spence, for example, alleges that American Airlines’ investment strategy was disloyal because it was done for its own ESG purposes rather than that of the fund’s participants and beneficiaries, and many other workers may share this view.
