State Street chief says it could use shareholder powers to force boards to act on climate

The world’s biggest fossil fuel companies must take action on climate change or their directors could face being voted out of their jobs, the head of one of the world’s leading asset managers has warned.

In an exclusive interview with the Guardian, Ron O’Hanley, the chief executive of State Street, said his firm could consider taking the radical step of voting against the reappointment of entire company boards if they were not taking sufficient action to deal with the climate crisis.

While it would be “very dangerous” to vote out directors without reason, he said State Street could resort to the measure if it judged company managers were not reacting to the risks climate change posed to their business model or engaging with the transition away from oil, gas and coal.

With fossil fuel companies under increasing pressure to tackle the climate emergency, O’Hanley’s remarks could signal a new attitude by asset managers, who are also under growing pressure to behave responsibly.

State Street is a Boston-based money manager that oversees stocks, bonds and other financial assets worth $2.2tn (£1.8tn) for pension schemes, university endowments and insurance companies.

It is the third largest manager in the world behind BlackRock and Vanguard. Together they are known as the big three.

State Street handles investments worth at least $38.3bn in publicly listed fossil fuel companies, according to an analysis for the Guardian by InfluenceMap. Its stakes afford it a say on company directors, as well shareholder decisions on improving emissions disclosures and ensuring companies are aligned with the Paris agreement.

The State Street boss pointed to its “aggressive” historical voting record on issues such as gender diversity on boards, and suggested climate change could become a priority, but refused to give a defined timescale.

Large asset managers such as BlackRock and Vanguard have faced criticism for routinely voting against efforts to improve climate-related financial disclosures, appointing board directors to deal with climate-related business risk and publishing substantive emissions data. State Street’s record is mixed, although O’Hanley’s comments could signal an escalation in the firm’s approach.

“If we conclude that a company’s board is not taking into account these risks then we will either vote all the board out or we’ll use our vote against the board or we’ll use it against individuals on the board that we think should be acting and aren’t,” he said.

“So it could be against the company chairman, against the head of the risk committee, but that is our strongest tool, our vote. And it’s a powerful tool because although it only takes a majority for someone to be voted in, typically if a significant minority has voted against a particular individual on the board that’s generally taken as a lack of confidence and that will cause the person to leave, so these votes are important. It’s a high responsibility and we understand that.“

Large asset managers, who do not own companies but exercise shareholder powers on behalf of clients, are uniquely positioned to hold the boards of oil and gas companies to account on the climate crisis and ensure a green energy transition.

O’Hanley told the Guardian that State Street preferred to discuss politically sensitive corporate governance issues such as the climate crisis, background checks on gun purchases in the US and board diversity in private with companies at first, opting to use its voting power as a last resort to demand action.

He added: “Our work doesn’t revolve just around the vote. I mean at this moment, now, the entire team is out engaging with our various portfolio companies. They do this all day every day and they’re, on a company-by-company basis, developing a perspective on whether or not the board has this.

“But I think it’s very dangerous to just say that every oil and gas company ought to have its board voted out. I mean … Put it this way, some of the best technology that’s going to get us through this is actually coming from oil and gas companies, right, if you look at what some of them are doing on renewables.

“Carbon capture, the leading carbon capture technology at the moment is Occidental [Petroleum]. Without Occidental, society wouldn’t be as far along as it is on carbon capture. It’s not as easy as saying let’s just vote the whole lot out.”

Negative emissions technology such as carbon capture has been put forward by the oil and gas industry as a solution to the climate crisis, but there is widespread scepticism about its long-term viability.

Pushed on when State Street would start using its vote more aggressively, O’Hanley said: “We engage as investment analysts do with each of the companies, determine where they are in dealing with this risk and overseeing this risk. And if our conclusion is they’re not then we will take a vote, but we don’t have a quota of votes.

“It could be very much in the next season, it could be in 15 years we’re voting out people.”

The asset management veteran also agreed that the industry must do more to improve disclosures around green and sustainable investing. Asked why State Street offered some fossil-fuel-free investment funds that had clear exposure to the fossil fuel industry, O’Hanley said his company was working hard to improve information about so-called environmental, sustainable and governance (ESG) investing, the acronym used for green investing.

“One person’s ESG isn’t another person’s ESG. Part of this comes down to definitions and again, we would completely agree with you that there needs to be some kind of measurement here. We’re working quite hard on that. We’re working with some of the largest index providers in the world and you will see us announcing a few tools in a very short time frame that will help address that very problem that you’re stating,” O’Hanley said.