One of the world’s largest asset managers is narrowing its focus on the climate crisis and gender diversity as it continues to emphasise transition over divestment, while exercising its voting rights to influence change.

State Street Global Advisors (SSGA) will expect companies in major indices in the US, Canada, UK, Europe, and Australia to be aligned with the Task Force for Climate-related Financial Disclosure (TCFD) framework, according to its 2022 proxy letter by chief executive Cyrus Taraporevala seen in advance by AsianInvestor.

The investment management firm will also require these companies to have at least one woman on their boards during the 2022 proxy season and have 30% of their boards comprise women by 2023.

“In each instance, SSGA is prepared to vote against the chair of the board’s nominating committee or the board leader should a company fail to meet these expectations,” the letter wrote.

SSGA has more than $3 trillion assets under management, making it the fourth-largest money manager in the world, according to consultancy Willis Towers Watson.

In an extension of 2021’s proxy letter that emphasised ethnic diversity, the firm also stated in this year’s note that it will take voting action against companies that do not have people of colour on the board or disclose diversity information.

Benjamin Colton

“The 2022 proxy letter can be looked at as a continuation of the focus areas that we've had for a very long time. We have been focusing on climate since 2014, but we have continued to refine our expectations for companies,” said Benjamin Colton, global co-head of asset stewardship, in an Asia exclusive interview with AsianInvestor.

“TCFD, as a baseline disclosure, we feel that all companies need to be thinking and considering the risks and opportunities related to climate change… Companies now should have had enough time to learn more about the framework and start disclosing.”

TRANSITION OVER DIVESTMENT

SSGA also plans to narrow in on high-emitting sectors such as oil and gas, utilities and mining, and focus on developing quality transition plans for the companies in these sectors.

However, Colton emphasised that the firm was not looking to shame companies that were not performing well.

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“We don't want to look at this on a spectrum of brown versus green; this is really about transition. We don't want to be prescriptive and telling companies that they need to become green, because we think it might be more effective for a dark brown company to move closer to the green spectrum,” Colton said in a video interview from New York, where he is based.

“They might not get all the way to being a pure play renewable company… if they are on the dark brown spectrum. We need to be understanding their pathway to getting there. Too often are we seeing that the discussion is being polarised – brown versus green - and I don't think that's very productive. We want to understand what the transition plan looks like. And we want to invest accordingly.”

While the firm does have a stock exclusion list that includes controversial weapons, tobacco, UN Global Compact violations and Swedish Ethical Council exclusions, Colton maintained that from a stewardship perspective, “we can't just sell these portfolio companies, we are going to be holders of these companies for a very long time.”

“We think that the power of engaging and speaking to these companies and then also having that accountability mechanism, which is the director vote - which we think is one of the most robust accountability mechanisms - is a tool that we have at our disposal.”

In 2020, the firm engaged with 2,400 companies and voted in 19,000 meetings. While SSGA has voted with management on a majority of shareholder proposals, it did vote against management in 40% of proposals on corporate governance, and a similar proportion on ESG, according to a report the firm published on the Harvard Law School Forum on Corporate Governance.

GREENWASHING & TRANSPARENCY

Asked about his views on greenwashing, Colton said: “One of the core responsibilities that we have, especially from a stewardship perspective, is to be as transparent as we can, on what our expectations are, and how we're analysing different elements of ESG.”

“If you look at the history of our voting on environmental and social proposals over the last five years, you'll see that we've been very predictable, we outline what we expect, we outline how we're going to vote. So our philosophy is very clear,” he said.

Greenwashing has been a major concern in the industry with fund managers including SSGA having been accused of having shortcomings, such as being misaligned with the Paris Agreement.

Perhaps the most prominent greenwashing scandal last year was accusations by whistleblower Desiree Fixler that her former employer DWS had overstated its green investment efforts.

Last year, London-based non-profit InfluenceMap named SSGA, alongside others such as BlackRock and UBS for having sustainable funds that were misaligned with the Paris Agreement.

The investment management firm’s response has been that the firm offers a range of ESG strategies, including funds aligned to the Paris Agreement, and funds that meet climate objectives in other ways.

ROAD TO NET ZERO

Colton also indicated that SSGA takes a more measured approach to net zero.

“If we blindly push companies to become net zero by 2050, or timelines that line with the Paris Agreement, there could be unintended consequences that we need to be thinking about. For example, if the cost of disclosure continues to increase, one solution that the company could become net zero is to spin these assets out or sell these assets to the highest private bidders,” he said.

“We've seen private equity companies snapping up these assets…. If they do sell it to private equity, we lose disclosure, we lose our seat at the table as owners, oftentimes these private equity firms will be higher emitters than they would be in the public space where there have more active owners or more sustainability, conscientious investors,” he said.

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SSGA in 2021 announced that it had joined the Net Zero Asset Managers Initiative, which has committed to net-zero greenhouse gas emissions by 2050 or sooner.

Unlike some asset managers such as BNP Paribas Asset Management that are explicit about integrating ESG practices across all funds, SSGA does not bill all its funds as ESG-integrated.

“Not all funds are classified as ESG. I wouldn't be able to give specific figures just because I'm not really close to the capital allocation part [of the business], but in terms of the integration, all of our portfolio managers are able to access the data tools that we have, whether it's joining engagements that we have with portfolio companies, providing us with their input on ESG issues, contributing to our prioritisation process and also access to our proprietary ESG score, which is called R-Factor,” he said, referring to the ESG rating system that SSGA launched in 2019.