Says recent corporate scandals show need to assess ESG risks
Asset manager gives guidance on evaluating sustainability
Climate change is no longer listed as a top issue on the White House website, but it’s very much at the forefront for $2.47 trillion asset manager State Street Corp.
The Boston-based asset manager is pressing companies to disclose much more about how they are preparing for the impact of climate change on their businesses, according to an annual letter expected to be sent to boards of corporations it invests in Thursday. State Street wants more transparency from companies on how they are thinking about climate change and other social issues, according to the letter.
"Over the long-term, these issues can have a material impact on a company’s ability to generate returns," State Street said in the letter. "Corporate scandals of the last few years around automotive emissions, food safety or labor issues have emphasized the need for companies to assess the impact of ESG risks."
State Street said in the letter that more corporate boards have asked it for guidance on how it’s thinking about climate change amid a shift in its proxy voting over the past few years. State Street supported 46 percent of climate-related proposals at shareholder meetings last year, compared to zero at rival asset managers BlackRock Inc., Vanguard Group and Fidelity Investments, according to a review of public filings by investor environmental advocacy group Ceres and Fundvotes.com. In the 2012 proxy season, State Street supported about 13 percent of climate-related proposals, according to those groups.
"Climate change may be the poster child for risk out there," Ronald O’Hanley, president and chief executive officer of State Street’s investment management arm, said in an interview. "We’re asking companies to make sure they are identifying and communicating both their risks and opportunities."
State Street wants to be as transparent about what it expects from companies on environmental and social issues as it is on issues of corporate governance, such as independent board leadership, O’Hanley said. The firm also sent corporate board members an eight-page framework about how it hopes companies will evaluate and communicate on sustainability issues, such as having a process for identifying risks and incorporating that into their long-term strategy.
State Street’s approach differs from other asset managers. In an annual letter BlackRock CEO Laurence Fink sent to CEOs earlier this week, he said ESG information provides "essential insights" for investors. But he wrote that the firm doesn’t want to "micromanage" companies and aims to hold boards accountable for performance on long-term value, indicating BlackRock may continue to withhold support from shareholder climate proposals.
Climate change has been a priority issue at State Street since 2014, the asset manager said in the letter. The firm has also updated its thinking on these issues since it began offering more sustainability-focused products and holding a larger portion of client assets in index funds, it said.
State Street also wants companies to produce better information on sustainability, as it seeks to shift its ESG strategies to boost returns, O’Hanley said. The firm wants to move away from negative screening that excludes companies from indexes based on ethical concerns and shift toward "positive screening" that includes companies in products, based on meeting certain sustainability metrics, he said.
"We’re thinking about long-term value creation here," O’Hanley said.