Texas Ruling Opens Door to New Era of Scrutiny: ESG Investing

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(Bloomberg) — The 401(k) ruling against American Airlines Group Inc. for allegedly pursuing a “green” activism agenda is almost certain to add to the scrutiny facing ESG investment strategies.

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A US District Court judge in Texas said last week that the airline broke federal law by filling its 401(k) plan with funds from investment companies that pursue ESG goals. The decision is one of the first major legal victories for opponents of environmental, social and governance investing.

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According to the judge, American Airlines violated the Employee Retirement Income Security Act’s directive to act loyally and in the best interests of retirement-plan participants by hiring and keeping BlackRock Inc. to manage billions of dollars in plan assets despite its “ESG-oriented investing and proxy voting activism.”

While the verdict is “a notable win for anti-ESG advocates,” it poses “only modest pecuniary risk,” Bloomberg Intelligence senior analysts Elliott Stein and Rob Du Boff wrote in a report.

“Anti-ESG sentiment will continue to drive litigation seeking to remove ESG considerations from investment decisions,” the analysts said. “Though the lawsuits shine a light on ESG practices of asset managers like BlackRock, we don’t think the financial fallout will be significant.”

BlackRock wasn’t named as a defendant in the lawsuit, but the court’s decision is an indirect attack against the asset manager, Stein and Du Boff said. “The immediate effect is that other companies using BlackRock as a retirement-plan manager or offering its funds will need to scrutinize it more closely and more deliberately link ESG goals to financial performance, lest they also get sued,” they said.

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BlackRock also is the target in pending cases in Indiana, Mississippi and Tennessee for allegedly deceiving investors about its investment strategies.

“While we don’t think the company’s statements concerning ESG investing are necessarily inconsistent or rise to a level of deception,” it’s possible that BlackRock will face “modest, multimillion-dollar fines, though clarifying disclosures may suffice,” Stein and Du Boff said.

State pension funds also might opt to remove BlackRock as manager, as Indiana did in December, they said.

BlackRock said in a statement that it always acts “independently and with a singular focus on what’s in the best financial interests of our clients. Our only agenda is maximizing returns for our clients, consistent with their choices.”

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NEWS ROUNDUP

• Musk Rejection | Europe’s largest pension fund sold its entire €571 million ($585 million) stake in Tesla Inc., partly due to criticisms of Elon Musk’s remuneration package.
• Impax Loss | Schroders Plc won a £5.2 billion ($6.3 billion) investment mandate from St. James’s Place Plc, as the wealth manager reassigns a contract it pulled from Impax Asset Management Group Plc.
• Bank Regulation | Europe’s financial regulator for banks said lenders in the bloc must regularly and comprehensively measure ESG risks, in new guidelines designed to shore up the industry amid growing threats to financial stability from environmental and social factors.
• Alzheimer’s | Investors seeking the next obesity-like market opportunity will be closely watching developments related to treatments for Alzheimer’s disease in 2025.
• ‘Culturally Neutered’ | Mark Zuckerberg lamented the rise of “culturally neutered” companies that have sought to distance themselves from “masculine energy,” adding that it’s good if a culture “celebrates the aggression a bit more.”
  • Read More: Meta Retreats From Diversity and Inclusion, Appeasing Trump
• Pay Gap | The gender pay gap is widening for Europe’s non-executive board members in the financial-services sector, despite a drive to recruit more women to these senior roles.
• Japan Market | Japan is propping up issuance in the global sustainable-debt markets, helping to fill the void left by the US, where issuers have retreated amid political backlash.

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BLOOMBERG RESEARCH

• Bank Targets | Financed CO2 emissions from the oil, gas, power, cement and steel sectors are set to drop 41% between 2019 and 2030 for the 41 banks that set relevant targets. (Bloomberg Intelligence)
• Renewables Rollout | European countries’ 2030 climate goals may be undermined by the diverging fortunes of the region’s renewables rollout. While solar-power installations look poised to exceed the targets set for the end of the decade, wind-turbine deployments may fall almost 30% short. (BloombergNEF)

• Clean Hydrogen | The clean-hydrogen industry is grappling with a slowdown. However, pockets of demand emerged in the chemicals and other sectors, with companies contracting 2 million metric tons of clean-hydrogen volume since April, led by Dow Chemical Co. (BNEF)
  • Read More: Clean Hydrogen Needs Far More Binding Agreements to Thrive: BNEF
• Transition Bonds | Transition bonds have taken over Japan’s sustainable-debt market. (BNEF)
  • Mizuho Financial Group was the top underwriter in Japan’s ESG bond market in 2024. (Bloomberg Intelligence)

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• CEO Turnover | Chief executive officers are on a shorter leash because of shareholder activists. (Bloomberg Intelligence)
• EV Sales | Despite some headwinds, global electric-vehicle sales are set to increase 30% in 2025 to 22 million. (BNEF)

BLOOMBERG OPINION AND ANALYSIS

• No Windfall | Shares of Boeing Co. don’t have enormous upside, and cash profits from a turnaround will need to be reinvested in the business, not returned to investors, according to columnist Thomas Black.
• Saudi Outpost | US’s reliance on Saudi oil is nearing its endgame, wrote columnist Javier Blas.

• Invisible Damage | A stealthy cloud of pollution seeping into people’s lungs will be felt for years to come from the Los Angeles fires, wrote columnist David Fickling.
• Power Threat | The Los Angeles fires are a $9 billion threat to power companies, wrote columnist Liam Denning.

• Fantasy World | Activists and scientists hoped that once more people experienced the dangers of the climate crisis firsthand, they’d be compelled to act. That’s not working out, wrote columnist Lara Williams.

FUNCTIONS FOR THE MARKET

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LA Wildfires | Forecast high winds are raising the prospect of more wildfires in Los Angeles, adding to the risks for holders of insurer stocks and utility bonds.

• Insurance claims caused by wildfires since Jan. 7 may result in losses of as much as $30 billion.
• Chubb Ltd. and Allstate Corp. are among insurers whose shares have slumped more than 5% this year, adding to hurricane-season losses.
• Utility Edison International, whose stock slumped 28% this year, found no evidence it was to blame for starting one of the fires.
• Use Bloomberg’s MAP, WFOR, NCAT, EEG and WATC tools for analysis. Run NSUB FFMSTORY to subscribe to functions-based stories.

ESG-FOCUSED FIXTURES

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