Recently, a Texas federal court denied the defendants' motion to dismiss in a lawsuit featuring allegations that an employer's 401(k) plan, which allegedly relied on ESG principles when making investments, violated ERISA. Specifically, the plaintiff alleged that defendants “includ[ed] [] ESG funds in the Plan that underperformed compared to similar funds in the broader market,” and that “Defendants violated their fiduciary duties . . . by investing in funds managed by [those] who engage in conduct, such as proxy voting, to support ESG policies rather than purely pursuing financial gain.” The court held that plaintiff's allegation “that ESG investment funds have ‘known poor performance relative to benchmark indices and to similar investments . . . available in the marketplace’” was sufficient to survive a motion to dismiss.
Notably, the Court stated that “Plaintiff has adequately alleged that Defendants breached their duty of prudence by selecting, including, and retaining investment managers who pursue ESG objectives rather than focusing exclusively on maximizing financial benefits.” In other words, the mere fact of choosing an investment manager who considered ESG factors when making investments could constitute a breach of fiduciary duty in violation of ERISA. Further, when analyzing the allegations concerning a breach of the fiduciary duty of loyalty, the court noted that the influence of “the company-wide ESG policy” was “not appropriate to resolve at [the motion to dismiss] stage,” indicating that a company's ESG policy could be used to support allegations of ERISA violations--in particular, that “corporate goals [could] influence their fiduciary role.”
Although this is only a single decision from a conservative judge in an individual district court (N.D. Texas), the significance of this holding, and the influence of this decision, should not be underestimated. The number of lawsuits alleging violations of fiduciary duty based upon a supposed adherence to ESG factors rather than financial ones has proliferated in recent years, and a court has now held that merely utilizing investment managers that consider ESG factors or maintaining a company ESG policy could be the basis for a lawsuit for breach of fiduciary duty. Still, this lawsuit is at a relatively early stage, and it is altogether possible that plaintiff's allegations will not survive summary judgment, or trial.
A conservative Texas federal court’s decision to green-light a 401(k) lawsuit against an employer for its ties to environmentally friendly asset managers asserts a new, less-rigorous pleading standard that sets the stage for more private-sector ESG claims. US District Court for the Northern District of Texas Judge Reed O’Connor denied the airline company’s motion to dismiss the proposed class action lawsuit on Feb. 21. The ruling shocked many in the workplace benefits industry who said they expected a swift end to what they call a frivolous environmental, social, and corporate governance claim.
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