03 Jun 2021 State Street CEO Puts Personal Politics Ahead Of Investors And Clients
Set a new place at the table, Larry Fink, Brian Moynihan & Co. Ronald O’Hanley has earned his spurs, and is ready to join you at the Roundtable of Woke Corporate Prevaricators, the Order of the Forked Tongue.
O’Hanley qualifies because of his indefensible assertion that ESG investing (ostensibly for the benefit of Environmental, Social & Governance interests) is pursued at State Street – an investment house like BlackRock and Vanguard – because the strategies are proven by objective research, neutral as to political and policy preferences, to be in the best interest of long-term company value. As a result, O’Hanley implied last week, State Street need not discover the policy interests of State Street investors because no policy interests are relevant to the decisions.
But State Street’s ESG research is not at all policy- and politics-neutral. The question must then arise: whose personal political and policy preferences are being used? It’s not those of the investors, and it’s not those of ultimate shareholders (i.e., not other intermediaries like pension funds that likewise substitute managers’ personal policy preferences for those of the pension beneficiaries who have earned those funds). So it must be those of State Street’s executives and research directors.
This explains O’Hanley’s pretense that ESG decisions are free of policy and political slant. But this means that O’Hanley and friends not only substitute their personal policy preferences for those of investors and shareholders (self-dealing, in fiduciary law) but also cover it up (which indicates willfulness). This makes for very hot water and lots of potential legal liability for O’Hanley and pals.
State Street held its annual shareholder meeting last Wednesday. As part of my day job I “attended” the virtual meeting and asked O’Hanley about ESG investing. After noting Warren Buffett’s recent opinion that ESG investing is often “asinine” and built on “moral judgments” about which it is “very tough” to decide real benefit, I asked why O’Hanley thought he knew better than Buffett. Then I asked, “Can you explain in detail what you do to ensure your proxy decisions reflect the actual wishes of your investors instead of those of State Street executives?”
In fairness to O’Hanley, here is his answer in full:
Thank you for the question. State Street Global Advisors is the third-largest asset manager in the world, and a large proportion of its roughly 3.6 trillion in assets under management is in index funds. A unique characteristic of an index fund is that as long as a stock is in the index we will be invested in that stock and in that company. As a result, for a long time we’ve taken the view that engagement with shareholders is quite important because we don’t have the ability to, in effect, not own the stock if it’s in the index.
Our views on so-called ESG matters are, in fact, not based on politics but are based on value, that is, the value of the company. And as our State Street Global Advisors does its research, it has come to the conclusion that there are many elements of governance, of environmental policy, that in fact do have long-term impact on a company’s value. It is on those matters that State Street will exercise, will engage, from a stewardship perspective. Given that it doesn’t have the ability to disinvest, its actions if it decides that a company is in fact impairing long-term shareholder value, one of the only actions it can take, is its vote, whether it’s voting against particular directors, voting against entire boards of directors. But again, that’s always done in the context of a view on what’s in the best interest of long-term shareholder value.
In short, there are apparently no policy preferences or biases involved in State Street’s research, on which the company bases its ESG investing decisions – hence no need to find out what State Street’s ultimate investors’ beliefs or preferences are. Or, as Cyrus Taraporevala, CEO of the research arm, State Street Global Advisors (SSGA), put it last year, “We see that shareholder value is increasingly being driven by issues such as climate change, labor practices, and consumer product safety. […] Ultimately, we have a fiduciary responsibility to our clients to maximize the probability of attractive long-term returns.”
Analysis quickly undermines these claims of objective, neutral and policy-preference-free research and decision-making. Our review of the SSGA research showed constant uncritical acceptance of left-wing assumptions without any corresponding critical evaluation of those assumptions, and certainly with no acceptance of center/right assumptions.
Consider, for instance, SSGA’s embrace of zero-carbon goals, goals set to political guidelines pushed by the United Nations in the Paris Climate Accords and following statements. SSGA seems not to have considered the political nature of the UN reports, nor to have undertaken its own apolitical scientific analysis. It does not seem to account for the likelihood that any reductions by American corporations will be swamped by the big producers, especially China and India, who have no real-world intention of reducing their emissions, and in fact behave as though they’ll grow into the foreseeable future. It does not consider the likelihood that technology will not be affordably available to permit zero-carbon emissions on the United Nations’ timeline without crushing the American economy, American competitiveness, and the American people.
If it does not consider these factors, and similar factors in other ESG contexts, then its decisions are purely political and ideological, and – as O’Hanley tacitly admitted, are based solely on the political and policy preferences of State Street executives. Even if those concerns are considered, how they are weighed in making final judgments necessarily requires exactly the sort of value judgments that O’Hanley pretends not to make.
Meanwhile, it certainly seems probative that all the ESG positions that State Street pushes are left-wing and are framed in left-wing parlance. Wouldn’t objective analysis for long-term value come up with some positions that are favored by the right, which is generally much more pro-business and pro-growth anyway?
I wonder what the courts will think of all this. Discovery and expert testimony should be fascinating.
Scott Shepard is a fellow at the National Center for Public Policy Research and Deputy Director of its Free Enterprise Project.