On January 11, 2021 State Street's President and CEO, Cyrus Taraporevala, released the firm's annual letter to directors as well as Guidance on Enhancing Racial & Ethnic Diversity Disclosures.

Taraporevala opens his letter by describing 2020 as "no ordinary year," noting that the global health crisis and continued long-term risks around climate change have illuminated "systemic vulnerabilities and reinforced the connections we see across sustainability, inclusion and corporate resiliency."  The letter then outlines State Street's main 2021 stewardship priorities, which are focused on systematic risks associated with:

  1. Climate change
  2. Lack of racial and ethnic diversity

Climate Change

Consistent with State Street's new status (as of November 2020) as a signatory of Climate Action 100+, Taraporevala notes that in 2021 it will focus specifically on companies most vulnerable to transition risks due to climate change, as well as those in less carbon intensive industries that may faces risks from physical impacts of climate change.  The letter also emphasizes that State Street has since 2018 and will continue to ask all of its portfolio companies to use the Taskforce on Climate-Related Financial Disclosure's framework as a guide for developing climate risk disclosure.  These focuses are consistent with State Street's Climate Stewardship Review, which indicated that in addition to supporting climate-related shareholder proposals, it may take voting action against directors for unaddressed concerns relating to climate change. 

Racial and Ethnic Diversity

Responding to the challenges posed by the lack of publicly available racial and ethnic diversity data, and building on its August 2020 guidance regarding diversity disclosure, Taraporevala's letter announces additional Guidance on Enhancing Racial & Ethnic Diversity Disclosures.  This guidance further expands State Street's historic focus on gender diversity and the disclosure expectations outlined in its August guidance by adopting the following new proxy voting practices:

  • In 2021, State Street will vote against S&P 500 and FTSE 100 compensation committee chairs at companies that do not publicly disclose the racial and ethnic composition of their boards.  State Street indicates that disclosure on an individual director or aggregate basis is acceptable, but that such information cannot be combined with other aspects of demographic diversity, such as gender or national origin. 
  • In 2022, State Street will vote against:
    • S&P 500 Compensation committee chairs at companies that do not publicly disclose their EEO-1 Survey response, and
    • S&P 500 and FTSE 100 Nominating committee chairs at companies that do not have at least one director from an underrepresented community.

In addition, with respect to diversity-related shareholder proposals, State Street indicates that where a company's disclosure does not align with at least four of the five disclosure expectations outlined in its August 2020 guidance and engagement is unproductive, it will be supportive of such proposals. 

  • In summarizing outcomes and insights gathered from the 70 engagements State Street has conducted since August 2020 related to diversity disclosure, State Street observes that companies have been largely supportive of its disclosure expectations, noting that " 'the strongest disclosures overall are in the Technology and Financial Services sectors." It also discusses expansion of its focus to include the governance of "S," including examination of social risks and identification of best practices for board oversight of racial diversity and inclusion.

Other highlights from Taraporevala's letter include:

  • Emphasis on State Street's continued use of its proprietary R-Factor ESG rating system, which relies on the SASB standards.  You can read more about R-Factor scoring here.
  • Reassurance that State Street will continue to engage with companies to understand how they are managing and mitigating impacts of climate change. 

State Street's diversity and inclusion disclosure expectations, as laid out in its August 2020 guidance, include:
  1. Strategy: what role does diversity play in a company's broader human capital management practices and long-term strategy
  2. Goals: what diversity goals exist, how do those goals contribute to a company's overall strategy, and how are they managed and progressing
  3. Metrics: provide measures of global employee and board diversity, including racial and ethnic makeup, citing in particular the Equal Employment Opportunity Commission's EEO-1 survey as a framework for US companies to use in reporting diversity by race, ethnicity and gender across employee seniority levels 
  4. Board: disclose the goals and strategy related to racial and ethnic representation at the board level, including how the board reflects the diversity of the company's workforce, community, customers, and other key stakeholders
  5. Board oversight: describe how the board executes its oversight role in diversity and inclusion

If you have questions or comments, please email info@georgeson.com or call 212 440 9800.