The District Court for the Northern District of Texas recently ruled that a company breached its fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”) for permitting BlackRock’s inclusion as an investment manager of its employees’ retirement assets in a 401(k) Plan. After a four-day bench trial, the Court found that the company failed to “loyally act solely in the retirement plan’s best financial interests by allowing their corporate interests, as well as BlackRock’s ESG interests, to influence management of the plan.”

Core to the Court’s holding is its evidentiary determination that BlackRock “pursues a pervasive ESG agenda” that “covertly converts the retirement plan’s core index portfolios to ESG funds,” and that this harms the financial interests of 401(k) participants. As we have noted in prior memos, including The Future of ESG: Thoughts for Boards and Management in 2024, the politicization of ESG has led to “anti-ESG” legislation in several states and a general corporate and investor retreat from use of the term. BlackRock itself has publicly disavowed the term and recently began expanding voting choice programs to include voting policies that oppose energy transition and decarbonization efforts to appeal to a wider swath of its client base and allay the concerns of regulators. The Court ruling notes these recent moves, including BlackRock’s 2024 announcement that it was leaving Climate Action 100+, citing these distancing efforts as “telling” evidence of BlackRock’s “apparent recognition” that ESG investing was problematic under ERISA.

The Court found that the company “turned a blind eye to BlackRock’s ESG activism,” and did not sufficiently “monitor, evaluate, and address” the extent to which BlackRock was pursuing a “non-pecuniary ESG investment strategy.” The ruling described BlackRock’s influence over the company—as one of the company’s largest shareholders and a significant debt holder—as the explanation for the company’s “lack of accountability with respect to BlackRock.”

This ruling adds an additional layer of consideration for companies and boards seeking to navigate the evolving regulatory and legal landscape on ESG matters. It remains an appropriate and essential part of business judgment for companies to evaluate how key business risks—including those related to the environment, employees, and communities in which companies operate—may impact long-term performance. A number of companies are carefully crafting how they message their policies and thoughtfully considering the specific language they are using. Companies need to continue to be mindful of the current environment as they chart their path forward.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “District Court Rules BlackRock’s Inclusion as 401(k) Investment Manager Breaches Company’s ERISA Duty of Loyalty,” dated January 13, 2025.