A New Type of Pro-ESG Lawsuit, Or Is It?

By: Tony Roda, Joshua Campbell, and Ryan Muller, Williams & Jensen, PLLC

In a stark departure from recent litigation trends—and what some have called “a first-of-its kind class-action lawsuit”—a former Cushman & Wakefield employee alleged that the company breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by failing to consider risks posed by climate change to an investment fund offered in its 401(k) plan’s investment menu. Under ERISA, fiduciaries have a duty of prudence which requires careful selection and oversight of a plan’s investment options. In addition, under the U.S. Supreme Court’s 2015 decision, Tibble v. Edison Int’l, prudence requires that fiduciaries continuously monitor investments and remove imprudent ones.  

Renee Kvek’s complaint in Kvek v. Cushman & Wakefield U.S. Inc. highlights how Cushman’s business practices demonstrate the company’s understanding of the financial risks posed by climate change. Cushman is a real estate management company with a long history as an industry leader in sustainability. The complaint notes that “Cushman transitioned from an early adopter of climate change mitigation strategies and data-based technologies to a full-blown evangelist” throughout the 2000s and positioned itself as an expert in managing climate risk. In 2022, Cushman conducted a formal climate risk assessment, revealing a host of chronic and acute risks over the short, medium, and long term, all while mapping potential revenue opportunities for its own business.  

In contrast to the Cushman climate conscientiousness, Kvek alleges the Westwood Quality SmallCap Fund, an option in Cushman’s 401(k) investment menu, exposes investors to dangerously high levels of climate-related risk while failing to meet, let alone exceed, the returns of the Fund’s benchmark, the Russell 3000 Index. Industry experts identify six sectors as particularly vulnerable to climate risks: energy, utilities, materials, industrials, financials, and real estate. The complaint notes that the Westwood Fund “is more than twice as exposed” to these sectors relative to the Russell 3000. Kvek’s complaint highlights the stark contrast between Cushman’s business practices and its willingness to let its employees invest their retirement savings in industries subject to climate risk. 

In addition to the increased climate risk and underwhelming returns, the Westwood Fund’s fees were unreasonably high for a firm of Cushman’s size. With a net expense ratio of 79 basis points (bps), the fees were more than twice as high as comparable funds. One contributing factor was 10 bps Sub-transfer Agency fee, which none of the plan’s other funds incurred. A combination of these factors led to “tepid market adoption” of the Westwood Fund, a fact that Kvek says should have informed Cushman’s decision to offer this option. 

Taken together, the complaint asserts that Cushman’s management of the plan, particularly the absence of any sort of climate risk analysis, fails to live up to the fiduciary standards mandated by ERISA. This case presents a markedly different litigation strategy regarding the interpretation of fiduciary rules under ERISA as applied to environmental, social, and governance (ESG) investments than what the courts have seen thus far. Whereas the political momentum on the interpretation of fiduciary duties has swung toward banning the consideration of ESG factors when making investment decisions, this lawsuit offers a contrarian theory, namely that plan fiduciaries must consider such factors to prudently meet their duties.

Previously, the Biden Administration’s Department of Labor (DOL) authored rules dictating that, in certain circumstances, ESG considerations may factor into a fiduciary’s duty of prudence. Since taking office, the Trump Administration has rescinded several Biden-era Executive Orders and ended the government’s defense of the DOL rule in a case before the Fifth Circuit. In Congress, the House has passed the Protecting Prudent Investment of Retirement Savings Act (H.R. 2988), which would generally require that investment decisions consider only pecuniary factors with limited exception. On the state level, many Republican-led states have enacted legislation either restricting the use of ESG factors or focusing on pecuniary factors in investment decisions.

While the complaint offers a compelling case as to why the Westwood Fund might be inappropriate for inclusion in Cushman’s 401(k) investment menu, these shortcomings are evident notwithstanding the asserted climate risks. The complaint has been characterized by some as a run-of-the-mill ERISA case based on investment fees and performance. The question is whether the case simply attempts to wrap a standard complaint in new language to fit into the broader policy debate surrounding ESG considerations in retirement plan investment decisions – the proverbial old wine in a new bottle.

While the complaint emphasizes Cushman’s alleged failure to account for climate-related financial risks, many of the underlying allegations, such as underperformance and comparatively high fees, mirror more traditional ERISA fiduciary breach claims. As a result, the case may ultimately turn less on the pitched battle over ESG in retirement investing and more on familiar questions about prudent fund selection, fees, and plan oversight. How the court addresses the climate-risk theory, however, could signal whether similar arguments gain traction in future ERISA litigation.