The use of environmental, social and governance (or “ESG”) analysis in pension investing is controversial. It has been the subject of intense political interest (at least by the lights of the usually sleepy world of retirement plan regulatory policymaking). The Department of Labor has promulgated dueling ESG rules under successive presidential administrations. And as of this writing, a motion is pending in the Northern District of Texas on behalf of 25 states to preliminarily enjoin the Biden administration’s more ESG-solicitous rule. Yet from the perspective of plan fiduciaries evaluating whether to use ESG factors to guide investment, a more practical consideration than partisan back and forth has been concern that such investments might unleash a rash of fiduciary breach litigation from the private plaintiffs’ bar.
But for defined benefit plans, other legal developments in the last few years have largely mooted that prospect. In 2020, the Supreme Court issued a decision in Thole v. U.S. Bank, 140 S. Ct. 165 (2020), substantially narrowing standing for suits by participants in such plans on a 5-4 party line vote carried by the conservative majority. In that case, participants sued plan fiduciaries alleging that those fiduciaries had mismanaged the assets of their plan. The defendants argued that the participants lacked Article III standing, because they had no injury-in-fact: the defined benefit plan would be required to pay participants the same benefits regardless of how well or how poorly its investments performed. The plaintiffs invoked both traditional principles of the common law of trusts (which informed ERISA and which permit breach of fiduciary duty suits against trustees even in the absence of a loss to a trust beneficiary) and their statutory right to assert the claims of the plan itself under ERISA §§ 502(a)(2) and (3).
The Court sided with the defendants. It held that the interests of participants in defined benefit plans were not analogous to trusts and that Congress’s delegation of statutory enforcement authority to participants could not itself give rise to a concrete injury. The plaintiffs “received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives. Winning or losing this suit would not change the plaintiffs’ monthly pension benefits.” And so barring a suggestion “the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits,” the plaintiffs lacked standing.
A recent, non-ERISA case illustrates how these principles applied to a circumstance analogous to the ESG case. Texas statute prohibits the state’s public pension systems from investing in companies that boycott the state of Israel or otherwise engage in the “BDS movement”—a Palestinian-led social movement promoting the use of boycotts, divestment, and sanctions against Israel. See Tex. Gov’t Code § 808.051. Haseeb Abdullah, a participant in two Texas public pension plans, sued alleging constitutional claims under the Freedom of Speech Clause, the Establishment Clause, and the Due Process Clause. Abdullah v. Paxton, 65 F.4th 204 (5th Cir. 2023). But the court never reached the (perhaps dubious) merits of these claims, instead holding that Abdullah lacked standing to pursue his claims. The participant plaintiff’s theory was in part that the Texas divestment statute required the retirement systems to make investment decisions based on the state’s policy dictates “rather than pure free market considerations.” And, citing Thole, the Fifth Circuit explained that the payments under “defined-benefit plans—by their very nature—do not fluctuate based on the value of the overall fund,” and thus the only way Abdullah could establish standing was if “the Systems [would] not be able to pay out his benefits at all when he reaches retirement.” The court found the prospect that divesting from companies that boycotted Israel would bankrupt the Texas pension system too speculative. And so it affirmed dismissal.