03 Oct PUBLIC PENSION CORNER, #15
NEWS:
I. NZBA Shuts Its Doors
The Net Zero Banking Alliance, a formerly potent collection of banks from across the globe, has decided, by vote of its few remaining members, to close up shop. All large American banks left the Alliance late last year or early this year, and since then, it has been operating on borrowed time:
The decision was made following a series of high-profile departures from the coalition, leading to a vote by its member banks to significantly restructure the initiative from a membership-based alliance to a framework providing guidance for banks on setting decarbonization targets, and to support their climate transitions plans.
In a statement provided to ESG Today, an NZBA spokesperson said: “Members of the Net-Zero Banking Alliance (NZBA) have voted to transition from a member-based alliance and to establish its guidance as a framework… As a result of this decision, NZBA will cease operations immediately.”
The NZBA was launched in 2021, with members committing to transition operational and attributable greenhouse gas (GHG) emissions from their lending activities to align with net zero pathways by 2050, and to set 2030 financed emissions targets, initially focused on key emissions intensive sectors. In April 2024, the group issued new guidelines for climate target setting for banks, expanding its requirements to include a commitment to align capital markets activities such as debt and equity underwriting to banks’ 2050 net zero goals, in addition to the prior lending-focused commitment.
II. California Releases Its (Long) List of Companies Subject to Emissions Reporting
Last week, the California Air Resources Board (CARB) released its preliminary list of companies that will be subject to its new ESG/emissions reporting requirements, which will take effect in January. The list is long and includes just about every major corporation you could imagine:
The new laws will introduce climate-related reporting requirements for most large companies in the U.S., even as other climate disclosure regulations, such as the SEC’s climate reporting rule, appear increasingly less likely to be implemented. In total, the CARB list includes 4,160 U.S. companies, including the majority of S&P 500 constituents.
The regulations, SB 253 and SB 261, were approved by Governor Newsom in 2023, and signed into law in October 2024. SB 253 requires companies with revenues greater than $1 billion that do business in California to report annually on their direct Scope 1 and 2 emissions, and Scope 3 value chain emissions, including those associated with supply chains, business travel, employee commuting, procurement, waste, and water usage. SB 261 applies to U.S. companies that do business in California and with revenues greater than $500 million to prepare a report disclosing their climate-related financial risk, as well as measures to reduce and adapt to that risk.
Disclosures of Scope 1 and 2 emissions under the new law is scheduled to begin in 2026, covering the previous fiscal year, while Scope 3 emissions reporting will begin in 2027, while the first climate-related risk reports are to be published by January 1, 2026.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“The Pension Plan Earthquake”
Earlier this week, U.S. District Judge Reed O’Connor issued his final ruling in the case of Spence v. American Airlines Inc., et al. Both the case and the ruling are landmarks that signal important changes in the way ESG will be treated going forward, especially in the management of ERISA-governed pension plans.
In brief, the plaintiff sued his employer, American Airlines, for affiliating its retirement plan with BlackRock, king of asset managers and the primary long-term advocate of ESG and “sustainability” in investing. Spence claimed that this meant that his pension investments were focused on politics, not fiduciary returns, which, he continued, constituted a breach of AA’s fiduciary duties to him and all other plan participants. And for the most part, Judge O’Connor agreed:
O’Connor ruled that American Airlines was liable for fiduciary misconduct and had breached its duty of loyalty under the Employee Retirement Income Security Act by allowing BlackRock’s pursuit of ESG factors to influence the core index portfolios within the retirement plan, rather than acting solely in the plan’s best financial interest.
However, O’Connor stopped short of finding American Airlines had breached its duty of prudence, because it acted “in accordance with prevailing industry practices, which was fatal to plaintiff’s breach of prudence claim.” Further, O’Connor ruled that the plaintiffs failed to establish monetary losses to the plan; therefore, they were not awarded monetary damages.
While most of the commentary on this week’s ruling has focused on the second part of the above – the fact that O’Connor did not award monetary damages – that largely misses the bigger point. O’Connor has dealt serious blows both to ESG and to the firms that employ it in the management of client assets.
In order to understand exactly what I mean by this, it’s important to start with O’Connor’s initial ruling in the Spence case, which he issued in January. It was noteworthy for two reasons. First, O’Connor defined ESG in unambiguous terms:
It is important to be clear about what ESG investing actually is. The evidence and expert testimony revealed that an investment strategy assumes an ESG label when it is aimed at, in whole or in part, bringing about certain types of societal change. …
Investing that aims to reduce material risks or increase return for the exclusive purpose of obtaining a financial benefit is not ESG investing. Consideration of material risk-and-return factors is no different than the standard investing process when both are focused on financial ends. …
ESG investing is a strategy that considers or pursues a non-pecuniary interest as an end itself rather than as a means to some financial end.
This is the heart of O’Connor’s conclusion that AA breached its duty of loyalty. Moreover, it’s the heart of the broader case against ESG. That’s the nub of the entire controversy over ESG: ESG opponents say it’s a non-pecuniary, political pursuit, while ESG advocates say exactly the opposite, that it’s the ultimate long-term risk-management research technique, designed to address and improve corporate performance over a longer event horizon. That O’Connor took the anti-ESG side and that justified doing so using Larry Fink’s own words is monumentally significant. Lack of monetary damages notwithstanding, O’Connor’s ruling that AA breached its duty of loyalty puts a serious damper on the use ESG going forward.
Additionally – and perhaps more relevantly in the immediate sense – O’Connor also flagged the conflict of interest arising from BlackRock’s omnipresence in the finances of AA. In January, Bloomberg’s Matt Levine – one of the few analysts to see this portion of O’Connor’s ruling for the potential earthquake that it is – described the conflict as follows:
BlackRock worked for American: American’s pension managers hired BlackRock to manage their 401(k) funds. But American also worked for BlackRock: BlackRock’s funds are American’s third-biggest shareholder, with more than 8% of the stock, and “also financed approximately $400 million of American’s corporate debt at a time when American was experiencing financing difficulties.” American’s managers, who selected BlackRock to manage the 401(k) and oversaw its work, were also well aware that they were working for BlackRock:
Defendants’ own personnel put it best when describing this “significant relationship [with] BlackRock” and “this whole ESG thing” as “circular.” It is no wonder Defendants repeatedly attempted to signal alignment with BlackRock.
You sometimes used to hear this theory, about investment managers and corporations, going the other way: “Big asset managers like BlackRock tend to support corporate management in proxy voting, because they want to win the business of managing those companies’ pension funds.” Here the theory is that, because BlackRock was one of American’s biggest shareholders, American had to defer to BlackRock and couldn’t be too critical of its 401(k) management performance.
I noted in response that: “Taken to its logical conclusion, the conflict-of-interest portion of Judge O’Connor’s ruling would seem to suggest that the entire pension management business is conflicted and possibly in trouble.” Why? Because currently, “the largest 401(k) managers are asset management firms like Fidelity or Vanguard, subsidiaries of large banks, like Merrill Lynch (Bank of America), or dedicated recordkeeper companies that offer funds from the large asset managers (like Fidelity or Vanguard).”
And indeed, in his final ruling this week, O’Connor ordered AA to get its house in order and to distance itself from BlackRock’s direct influence:
O’Connor ruled that American Airlines must:
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- Not allow for any proxy voting, shareholder proposals or stewardship activities for the plan that are motivated by nonfinancial goals, such as ESG investing;…
- Be prohibited from using BlackRock or any other major shareholder of the airline to manage plan assets unless policies are in place to prevent individuals with corporate ties to the asset manager from being involved in plan fiduciary roles or management.
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Time will tell how easy it will be for AA to write and implement such rules. In the meantime, every major corporation will have to do much the same thing with its pension plan, to avoid being taken to court and risking being found in breach of its duty of prudence and, thereby, suffering financial penalties.
In sum, the pension world has been turned upside down. There are lessons here for everyone involved in managing others’ retirement savings.
