State Street Gets Heat from State Treasurers Over Environmental, Social-Justice Activism

Smartphone with logo of US financial services company State Street Corp. on screen in front of website. Focus on center-right of phone display, in Stuttgart, Germany, on May 22, 2021. (Unmodified photo)

A group of 17 state financial officers has taken on financial giant State Street Global Advisors, charging that, despite dropping out of Climate Action 100+ in February, the firm continues to leverage the shares it manages to pressure companies to go along with a progressive climate and racial agenda. 

In a March 14 letter, state financial managers charged that “State Street is using the power of all assets under management … to promote ESG issues across portfolio companies.” State official further alleged that “State Street pressures companies to adopt diversity, equity and inclusion (DEI) policies.”

ESG, which stands for environmental, social, and governance, refers to a movement originated by the United Nations in 2005 by which asset managers pledge to vote the corporate shares that they manage to compel companies to enact the United Nation’s “Sustainable Development Goals.”

“The state of Oklahoma is pushing back against these special-interest environmental groups in order to maximize the returns for the state of Oklahoma,” Todd Russ, Oklahoma state treasurer and one of the authors of the March 14 letter, told The Epoch Times. “Even the ESG supporters own people say that their green funds are going to underperform the oil and gas energy mix of other portfolios.”

State Street Global Advisors is the world’s third-largest fund manager, with more than $4 trillion in assets under management. Like many other large asset managers, State Street is a member of the UN-sponsored Net Zero Asset Managers initiative (NZAMi), the Glasgow Financial Alliance for Net Zero (GFANZ), and the United Nations Principles for Responsible Investing (UNPRI). 

Members of financial alliances like NZAMi pledge that they will work to advance climate and social-justice goals across the shareholdings that they manage for people who invest in their funds. While State Street has withdrawn from Climate Action 100+, many state officials say the firm’s continuing membership in similar clubs raises concerns about how it will reconcile commitments to fight global warming with the duty to maximize returns for investors.

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“This is all being done to maintain compliance with their global commitments, which they admitted are not in line with their fiduciary duties when they withdrew from Climate Action 100,” Derek Kreifels, CEO of the State Financial Officers Foundation, told The Epoch Times. “That was all for show, and now they are continuing down the same path that they have been for the last several years.”

Mr. Russ said that he has been asking other firms that manage money for his state whether they intend to stay in the various climate clubs that they have joined, but was told “that’s not a statement we have available at this time.”

“Their responses certainly indicated that they will maintain the alliances with these other climate action groups, which was very confusing and troubling to say the least,” Mr. Russ said. 

Many investors have actively demand that fund managers consider environmental and social criteria when investing their money. Pension funds for the city of New York, for example, demand that fund managers they hire consider ESG factors.

“Responsible fiduciary investing takes into account the environmental, social, and governance (or ‘ESG’) risks facing companies,” the city pension fund’s website states.

Accordingly, State Street offers both ESG and non-ESG funds. However, conservative state officials argue that ESG still ends up as the default option when it comes to voting shares.

“[State Street] admits that ESG factors are taken into consideration in determining what sorts of shareholder proposals to support or oppose in State Street’s benchmark policy and what sorts of changes in business practices corporations are pressured to adopt,’” state financial officers wrote.

Managing Portfolios for Climate Risk

Proponents of ESG often claim that a company’s exposure to rising global temperatures is an essential component of risk analysis, and that a company’s commitment to racial and gender diversity is an important metric for management competence. And for these reasons, ESG criteria are essential to prudent investing. 

According to State Street’s website, “As long-term holders of capital on behalf of our clients, we believe the informed exercise of voting rights, coupled with value-driven engagement, is one of the most effective mechanisms of creating value for our clients. Accordingly, our stewardship program proactively identifies companies for engagement and voting in order to mitigate material risks in our portfolios that may impact long-term value creation for our clients across a range of topics, including ESG/sustainability factors.”

But ESG critics are skeptical about that line of reasoning.

“I think they know they’re lying to the public,” Mr. Kreifels said. “They’re lying to investors, they’re lying to the pension board members whose fiduciary duty it is to manage these funds.

“This is a global push from entities that are trying to politicize these funds and achieve an end that they can’t get done in Congress or the courts, because they know they can’t win the argument,” he said. 

Proponents of ESG have been hard-pressed to show that it improves investment returns. Many analysts have argued that ESG will likely reduce returns because by avoiding sectors like oil and gas it reduces the diversity of portfolios. In addition, ESG funds typically charge higher fees because they are actively managed, compared to index funds which are not. 

Speaking before a Texas senate hearing in 2022, State Street Chief Investment Officer Lori Heinel stated: “I have no evidence that this [ESG] is good for returns in any time frame. In fact, we’ve seen the evidence to be quite contrary. 

“Last year, if you didn’t own energy companies, you did miserably compared to broad benchmarks,” Ms. Heinel said. “The year before, that was quite the opposite ... but that was just a happenstance, that’s not because it’s a good investment.”

State financial officers asked State Street to consider the financial risks that companies will face “from shifting from baseload-reliable [energy sources] to ‘green’ energies before those energies are technologically feasible and fully affordable.” They also requested that State Street consider the risk to companies that enact “equity-based programs” or social-justice marketing campaigns and then lose customers and employees, or get sued for violating civil rights laws that ban racial and gender discrimination. 

The Epoch Times contacted State Street Global Advisors to comment for this article but did not receive a response.