What to Know About State Street CEO’s Letter to Boards
CEO of State Street, Cyrus Taraporevala, recently published his annual Proxy Voting Agenda Letter, which serves as a sneak preview of State Street’s 2022 Proxy Voting Guidelines. The letter is intended for Boards of Directors and highlights State Street’s commitment to investment stewardship, which the firm views as a key part of its fiduciary duty to clients.
With 2022 seeing the continuance of the pandemic, supply chain disruptions, and social unrest, Taraporevala’s letter focuses on the importance of adequately managing during a time of great transition. The issues facing companies present both risks and opportunities, which, in his view, can either enable companies to achieve a competitive advantage if adequately managed or can lead to their downfall, if mismanaged.
The novelty and complexity of these changes require boards to adapt their thinking and, likewise, has led State Street to evolve its approach to stewardship, with its emphasis for 2022 being on accelerating a low carbon transition and facilitating more diverse workforces and boards.
Promoting a Low Carbon Transition
Like Larry Fink at Blackrock, Taraporevala endorses the Task Force for Climate-related Financial Disclosures (TCFD) as crucial in a low carbon transition.
He also highlights the need to establish clear, pragmatic pathways to achieve net zero. Taraporevala argues that net zero pathways will take a variety of forms and greater flexibility is necessary when thinking about possible approaches to achieving net zero, particularly when labeling assets. Currently, assets are either termed “brown” or “green” with little nuance.
In its attempt to provide greater flexibility in the net zero transition, State Street will assess companies using a spectrum from “dark brown” (e.g., coal usage) to “dark green” (e.g., wind power usage). In some cases, the use of natural gas – a “light brown” fuel – may be necessary to reduce emissions, as the shift to renewable energy will not happen overnight. Taraporevala explains that the goal for portfolio companies need not be purity in their transition plans, rather, their plans should demonstrate how the company will make progress to the end state of net zero. As such, State Street has the following climate disclosure expectations for the 2022 proxy season:
- Companies in major indices will be expected to align with TCFD’s climate-related disclosures, specifically: (1) board oversight of climate-related risks and opportunities; (2) Scope 1 and 2 emissions; and (3) targets for reducing greenhouse gas (GHG) emissions.
- State Street will engage with significant emitters around climate transition plans in 2022 and companies and directors that do not meet the investor’s expectations in 2023 should expect no votes.
Additionally, Taraporevala urges asset owners to create standardized disclosure requirements for both public and private portfolio companies of a certain size to prevent “brown spinning”, whereby public companies sell off high-emitting assets to private companies, making the public company seem “greener” despite the net result for the planet being the same.
Takeaway: Start aligning to TCFD, and work to establish, and disclose a pragmatic plan for reducing emissions.
Facilitating Greater Diversity in the Workplace and on Boards
Since 2017, with its “Fearless Girl Campaign,” State Street has pushed portfolio companies to add at least one woman to their Boards of Directors. Since then, almost 60% of State Street’s 1,486 companies that previously had all male boards now have at least one female board member. Despite the progress, Taraporevala believes there is still work to be done on diversity. As such, companies that do not meet the following diversity expectations will face voting action:
- In 2022, all holdings globally are expected to have at least one woman on their boards. Previously, this policy was only upheld for major indices in certain markets.
- In 2023, companies in major indices will be expected to have at least 30% female directors on their boards. This is anticipated to result in boards averaging 3-4 female directors and 3,000-4,000 female directors in total across affected industries.
Additionally, State Street is broadening its diversity requirements for the 2022 proxy season to include race and ethnicity and will vote against responsible directors of:
- S&P 500 and FTSE 100 companies that fail to have a person of color on their boards
- S&P 500 and FTSE 100 companies that do not disclose their boards’ racial and ethnic diversity
- S&P 500 companies that do not provide EEO-1 reports
Takeaway: If your board doesn’t have ethnic and gender diversity, develop policies to promote improving diversity within the board.
This year State Street’s focus on climate and diversity during proxy season will be sharpened. As you think about how your ESG plans will evolve over the coming year, consider how State Street’s new and enhanced priorities will impact your company and what it might signal for the investor landscape overall. To learn how to strengthen your ESG disclosures, contact us today and see how ESG Infinite can help.