In his last letter to boards as CEO of State Street Global Advisors, Cyrus Taraporevala (who has announced his planned retirement this year) writes that we are at a “moment of significant transition,” facing many challenges, including a pandemic, climate change and gender, racial and ethnic inequities, that have led to economic disruption and even political instability. How should companies address these challenges? SSGA expects its portfolio companies to manage “these threats and opportunities by transitioning their strategies and operations—enhancing efforts to decarbonize and embracing new ways of recruiting and retaining talent—as the world moves toward a low-carbon and more diverse and inclusive future.” Accordingly, SSGA’s “main focus in 2022 will be to support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.”
SSGA views issues of climate, diversity and human capital management to be “matters of value, not values—opportunities for companies to mitigate downside risk, innovate, and differentiate themselves from competitors.”
Climate. With regard to climate, Taraporevala observes that climate change and its systemic risks have been central to SSGA since 2014. In the years following, investors and companies have become more knowledgeable and sophisticated, with more companies providing climate-related disclosure aligned with the TCFD (Task Force for Climate-related Financial Disclosures) and other frameworks. But much progress needs to be made on the “journey to net zero,” and, although “more companies are making net-zero commitments, with over one-fifth of the world’s 2,000 largest public companies having committed to meet a specific target, few have provided a clear roadmap to achieve these goals.” [Emphasis added.] SSGA recognizes that, for many companies, the pathway may not be straightforward: “in general we believe that the transition will be very hard and non-linear for most. We anticipate that many companies will likely need to adopt approaches that require experimentation, innovation, and ongoing adjustments along this unchartered journey.” At the end of the day, SSGA is looking to see company transition plans that reflect “pragmatic clarity around how and why a particular transition plan helps a company make meaningful progress” toward net-zero.
Taraporevala contends that the transition that is required will be “far more complex than ‘brown’ versus ‘green’ distinctions.” To be sure, nuance will be imperative: it’s possible that a power source transition from “dark brown” (such as coal) to “light brown” (such as natural gas) could have more impact on emission reductions than a transition from “green” to a “darker shade of green,” he asserts. In the short-run, to drive the transition, companies may need to look to “light brown” fossil fuels, “rather than relying on an improbable immediate shift to renewables to solve the massive climate challenge.” As a result, limiting perspective to only “brown” and “green” may “generate profound unintended consequences.”
He also introduces the pejorative term “brown-spinning,” which he uses to describe the practice of spinning-off (or selling) public companies’ “highest-emitting assets to private equity or other actors at a discount. The end result reduces disclosure, shields polluters and allows the publicly-traded company to appear more ‘green,’ without any overall reduction in the level of emissions on the planet.”
This proxy season, SSGA will focus its attention on “broad climate action in the market across sectors” as well as targeted action aimed at high-emitting companies:
- SSGA is promoting the use of the TCFD (see this PubCo post) and expects companies in major indices to disclose in alignment with the “four pillars” of the TCFD framework: Governance, Strategy, Risk Management, and Metrics and Targets. More specifically, SSGA will be considering “whether the company discloses: (1) board oversight of climate-related risks and opportunities; (2) total direct and indirect GHG emissions (‘Scope 1’ and ‘Scope 2’ emissions); and (3) targets for reducing GHG emissions.” According to SSGA, approximately one-third of the S&P 500 do not provide TCFD disclosures. SSGA “will start taking voting action against directors across applicable indices should companies not meet these disclosure expectations.”
- For the most significant emitters, SSGA will use targeted engagement “to encourage disclosure aligned with [its] expectations for climate transition plans, which covers 10 areas including decarbonization strategy, capital allocation, climate governance, and climate policy. In 2023, [SSGA] will hold companies and directors accountable for failing to meet these expectations.”
Diversity. Taraporevala notes that SSGA began to champion board gender diversity in 2017, when it initiated its Fearless Girl Campaign on the eve of International Women’s Day. The announcement included a photo of the statue of a young girl, as a symbol “of the need for action” and “the power of women in leadership,” that State Street had placed right near the Wall Street “charging bull.” That now-famous statue of a young girl has since been moved to the steps of the NYSE and has been given the name “Fearless Girl.” Taraporevala reports that, currently, 862 (approximately 58%) of the 1,486 companies SSGA previously identified with all-male boards have added one or more women directors, and last year, each company in the S&P 500 had at least one woman on its board.
For this year, SSGA has enhanced its diversity policy:
- This proxy season, SSGA expects each of its portfolio companies—not just those on major indices—to have at least one woman on its board.
- Beginning in the 2023 proxy season, for companies on major indices, SSGA expects their boards to be composed of at least 30% women directors, likely resulting in an average of three or four women directors on each board and about 3,000 to 4,000 additional women directors across covered indices.
SSGA indicates that it 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.”
In addition, SSGA has extended its emphasis on gender diversity to also concentrate on racial and ethnic diversity, including disclosure, board composition and board oversight of DEI more broadly. Taraporevala reports that, compared to 2020, more than twice as many companies in the S&P 500 disclose the racial and ethnic makeup of their boards and triple the number of companies in the S&P 100 now disclose their EEO-1 reports. This proxy season, SSGA will take voting action against responsible directors if
- “(1) companies in the S&P 500 and FTSE 100 do not have a person of color on their board,
- (2) companies in the S&P 500 and FTSE 100 do not disclose the racial and ethnic diversity of their boards, and
- (3) companies in the S&P 500 do not disclose their EEO-1 reports.”
As he began, Taraporevala closes by highlighting the profound transitions that companies are facing. However, shareholders benefit, Taraporevala concludes, when “companies embrace transitions as opportunities for innovation and differentiation.”