Asset managers are watching a case making headlines with references to fiduciary duties, investment processes and fees.
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Climate Risk Meets ERISA: First-of-Its-Kind 401(k) Lawsuit Blends Novel Climate Theory with Traditional Fee Claims, but the Case May Be Weaker Than Its Headlines
A recently filed ERISA complaint has generated headlines suggesting a novel new theory of ERISA liability based on climate risk – but on closer examination, the case is not what it seems. In Kvek v. Cushman & Wakefield, U.S., Inc., the plaintiff, a former Cushman & Wakefield employee and participant in the company’s 401(k) plan, alleges that the plan’s fiduciaries breached their duties under ERISA by selecting a fund that carried excessive climate-related financial risk, chronic underperformance, and unreasonably high fees. This appears to be the first lawsuit that attempts to use ERISA to impose liability on plan fiduciaries for under-weighting the climate risk in their plan investments.
Plaintiff’s counsel and climate industry commentators have not been shy about touting this as a landmark case. But a closer look at the complaint and the fund’s own disclosures tells a different story. The case seems much weaker on the merits than its headlines suggest, and we do not see it as presenting meaningful new risk – either as a traditional 401(k) prudence case or as a novel climate-risk variant. It is worth noting a telling irony: after years of attacks by anti-ESG forces against asset managers for considering climate-related risk in investment decisions (including in the American Airlines 401(k) case discussed here and here), this case asserts a manager has not considered it enough. Both types of attacks appear built on false premises.
The Complaint: What It Alleges
The complaint takes aim at the Westwood Quality SmallCap Fund (the “Westwood Fund”), an actively managed small cap equity fund that was added to the Plan’s investment menu in 2021, replacing an allegedly lower-cost small cap option. The complaint weaves together several categories of alleged fiduciary failure:
- that the Westwood Fund was “dangerously, willfully blind to climate-related financial risks,” with more than twice the exposure to climate-vulnerable sectors as its benchmark;
- that it consistently underperformed its benchmark; and
- that its fees were more than double the average for domestic equity funds in similarly sized plans.
The pleading emphasizes that Cushman & Wakefield has publicly recognized climate change in its corporate capacity as a material financial consideration for its clients and built out a climate risk advisory practice – yet purportedly failed to apply any of that expertise as a fiduciary overseeing its employees’ retirement savings.
Unpacking the Case: Less Than Meets the Eye
The complaint is lengthy and notably saturated with climate risk framing, giving it the tenor of a climate-focused advocacy piece as much as a traditional ERISA pleading. But on closer inspection, there appears to be considerably less here than meets the eye. The core climate theory arguably rests on a false premise, and the more traditional 401(k) imprudence claims that do the real work beneath the climate narrative have notable factual gaps.
The Fund’s Own Documents Tell a Different Story. The Complaint seems to imply that the Westwood Fund is a defiant, anti-ESG vehicle whose managers deliberately courted climate risk. In reality, the fund’s own offering documents tell a different story. The Fund describes itself as a straightforward small cap growth strategy. It does not market itself as an ESG fund, but neither does it hold itself out as anti-ESG. Its prospectus does not discuss ESG integration one way or the other. In its risk section, the prospectus acknowledges that investments in real estate companies may involve climate-related risks – which is typical disclosure for a fund with real estate exposure.
Moreover, the adviser’s public statements on ESG integration are broadly consistent with industry norms. This is a critical distinction from a standard greenwashing case – the fund made no affirmative ESG commitments whatsoever, so there is nothing to have failed to honor. Rather, plaintiffs are trying to reverse-engineer the fund’s investment process from its portfolio holdings – essentially arguing that because the fund held positions in sectors the plaintiffs view as climate-unfriendly, the fund must not have considered climate risk. This attempt to turn portfolio composition at certain points in time into a targeted disregard of climate risk is a strained leap that seems unlikely to withstand scrutiny.
This Is How Active Small Cap Management Works. Much of the complaint’s force derives from comparing the Westwood Fund’s sector allocations against the Russell 3000 Index and concluding that the Fund was significantly overweight in climate-exposed sectors. But this comparison is misleading at best.
Active small cap managers are, by definition, making relatively concentrated bets in smaller, less well-known companies. That is, by design, the fundamental nature of the strategy and it is what an investor should expect when investing in a fund of this type. Small cap funds routinely take outsized positions in particular sectors relative to broad-market indices. They have years of significant outperformance and years of significant underperformance relative to indexes precisely because they are making active investment decisions about smaller companies that may or may not ultimately succeed.
A small cap fund that looks like its benchmark at all times would effectively be a more expensive index fund. The fact that an actively managed small cap fund has sector weights that differ meaningfully from its index is not, on its own, evidence of imprudence – it is more likely a reflection of how active management typically operates.
The Comparators Are Cherry-Picked. The complaint’s performance and fee comparisons appear deliberately designed to avoid the most relevant comparison: other actively managed small cap funds. Instead, plaintiffs compare the Westwood Fund’s fees to the average across all domestic equity funds in jumbo plans – a category that includes low-cost index funds and large cap strategies – and benchmark its performance against the Russell 3000 Index, which encompasses the entire US equity market rather than the small cap segment in which the Westwood Fund operates.
Actively managed small cap funds are inherently more expensive and carry a greater risk of periodic underperformance than passive or large cap strategies. Comparing against those broader categories rather than a true peer group inflates the appearance of both high fees and underperformance. Those familiar with ERISA litigation will recognize that this kind of comparator issue is precisely what defendant plans challenge – and often successfully – in these cases.
This weakness may take on added significance in light of Anderson v. Intel Corp. Investment Policy Committee, which the US Supreme Court has agreed to hear this term. At issue in Intel is whether ERISA requires plaintiffs to plead a “meaningful benchmark” when alleging imprudence based on a fund’s cost or performance – rather than merely alleging that costs are too high or returns are too low.
The Ninth Circuit held that plaintiffs must provide “a sound basis for comparison – a meaningful benchmark,” a standard that several other circuits have adopted in various forms and that the US Solicitor General and the Department of Labor have endorsed, arguing that imprudence claims “cannot be based on conclusory comparisons to market index composites.” If the Supreme Court adopts a robust meaningful benchmark requirement, it could make it considerably more difficult for claims like those in Kvek – which rely on comparisons to broad market indices and generic fee averages rather than to a true peer group of actively managed small cap funds – to survive a motion to dismiss.
The Climate Risk Theory Rests on a False Premise. The complaint’s central inference – that the composition of the fund’s portfolio demonstrates a failure to consider climate risk in the investment process – is a non sequitur. The fact that a portfolio holds companies in energy, utilities, or other climate-sensitive sectors does not imply the manager failed to consider climate risk. Plaintiffs here are attempting to reverse-engineer the fund’s investment process from its portfolio holdings – but the composition of a portfolio alone does not reveal the analytical process behind it. Many prudent active managers hold positions in energy companies, regional banks, and utilities for a variety of sound investment reasons, even after thoroughly considering climate risk.
The complaint asks courts to draw a conclusion about process from outcomes – precisely the kind of results-oriented reasoning that ERISA’s process-focused fiduciary standard exists to guard against. Once the climate rhetoric is stripped away, what remains is a questionable logical chain: the manager selected companies for the portfolio that the plaintiffs view unfavorably from a climate perspective, therefore the manager must have ignored climate risk. That inference is no more warranted than the equally flawed premise underlying anti-ESG attacks from the other direction – that considering climate factors in investment decisions is inherently a political or social exercise rather than a legitimate financial consideration. Both framings rest on unfounded assumptions and neither should form the basis of ERISA liability.
The complaint places great emphasis on the fact that Cushman & Wakefield, in its own business operations, possesses considerable climate risk management expertise – and argues that Cushman’s failure to deploy that expertise in managing its 401(k) plan evidences a breach of fiduciary duty. This makes for a good narrative, but it misapprehends the ERISA prudence standard.
The test for ERISA fiduciaries is not whether they deployed every specialized skill they possess; it is whether they acted as a “prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” In other words, ERISA asks how a reasonable fiduciary would act under similar circumstances – not whether a particular fiduciary maximized the use of all the specialized knowledge it happens to possess.
The fact that Cushman has a separate climate risk advisory business, standing alone, does not establish or even suggest that its 401(k) fiduciaries breached their duties. The relevant question is whether fiduciaries of similarly sized 401(k) plans would similarly consider climate risk as a discrete factor in the investment selection process – and it appears that the plaintiff has not yet made that showing.
At Bottom, This Is a Run-of-the-Mill 401(k) Fee Case in a Climate Costume. Beneath the climate risk overlay, this case follows a template that will be familiar to anyone who tracks ERISA class actions. The climate theory, while novel, is layered on top of conventional allegations that the fund was too expensive, underperformed, and had limited market acceptance – allegations that themselves have serious holes, as discussed above. The climate argument appears designed to generate settlement pressure with a notable narrative.
Key Takeaways for Asset Managers
This complaint does not appear to establish a meaningful new theory of ERISA liability, but it is worth tracking for several reasons:
- The climate theory is novel, even if not strong. To our knowledge, no prior lawsuit has directly attempted to use ERISA to impose liability on plan fiduciaries for failing to evaluate climate risk as a discrete financial consideration. If the theory survives a motion to dismiss – even as part of a broader imprudence claim – it could invite follow-on litigation targeting other plans. A future, stronger version of this theory could involve a fund that had more robust ESG disclosures or commitments and held investments in climate-sensitive sectors that actually caused demonstrable underperformance. That fact pattern would present a harder case for defendants.
- This case was not brought against an ESG fund. The complaint’s theory rests entirely on an alleged failure to consider climate risk as a financial factor – not on a fund that marketed ESG integration and failed to follow through. The negative inference the plaintiffs draw is about the absence of express climate risk discussion in the investment process, not about affirmative ESG commitments that were walked back. This is an important distinction for firms calibrating their disclosures: the case suggests that the absence of ESG-related discussion in fund documents could, in the view of creative plaintiffs, be used to support a negative inference about a manager’s investment process
- The settlement dynamic is worth watching. As noted above, the likely strategy is to combine traditional 401(k) allegations – which may be sufficient to survive early dispositive motions – with the novel climate risk theory, and then characterize any settlement as a climate-risk victory even if that theory was never tested on its merits. Asset managers and plan sponsors should be attentive to how the case is resolved and, importantly, how it is framed in the aftermath.
We will continue to monitor this case as it develops. In the meantime, plan fiduciaries should ensure that their investment selection and monitoring processes are well-documented and reflect consideration of all material financial risks applicable to the specific investment strategies under evaluation, and that the funds on their plan menus can withstand scrutiny with respect to fees, performance, and peer comparisons on an apples-to-apples basis.
Published by
Ropes & Gray LLP
Ropes & Gray LLP
