State Street further extends proxy voting choice to ETFs

State Street Global Advisors is vastly expanding its proxy-voting choice program, with an announcement this week that it will apply the policy to institutional shares of its index mutual funds and some of its exchange-traded funds.

It's the latest development in a relatively new phenomenon of big asset managers giving fund investors some say over how their shares are voted on proposals at the annual meetings of portfolio companies. That trend has coincided with right-wing groups and Republican state leaders putting immense pressure on financial services companies to disavow the use of environmental, social and governance criteria in their investing decisions.

Last year, BlackRock, State Street and Vanguard announced proxy-voting choice policies that would apply to a limited set of their investment options. However, those firms have all indicated that their programs will eventually apply to retail clients.

State Street currently allows clients in its separately managed accounts to control how their shares are voted, and late last year the firm extended that to certain institutional equity funds in the U.S. and U.K. The expansion of the policy to additional mutual fund and ETF assets is new.

“By empowering individuals with the choice to direct the vote of the shares they own through an ETF or mutual fund, we are placing a powerful tool directly in their hands,” SSGA CEO Yie-Hsin Hung said in the company’s announcement.

Eligible fund shareholders have a handful of voting preference options available through Institutional Shareholder Services, State Street noted. Those options are the ISS Benchmark, Sustainability, Socially Responsible Investment, Catholic Faith-Based, Public Fund, Taft-Hartley and Board Aligned policies, according to the firm’s site.

The policy will apply to 80% of “eligible index equity assets” by the end of 2023, State Street said.

AVOIDING THE ISSUE?

Whether these new policies will eventually be effective at stemming some of the criticism asset managers have faced from Republicans is unclear. Numerous states have moved forward with anti-ESG laws and regulations, and some attorneys general have queried financial services companies about their investing, engagement and voting policies, as well as about their affiliations with net-zero groups.

But big firms aren't voting shares in favor of some, if not most, ESG-related shareholder resolutions.

A report today from Planet Tracker found that BlackRock, Vanguard and SSGA have voted against biodiversity-related proposals in at least 80% of cases.

Among all investment providers, shares of funds that have sustainability or ESG themes voted in favor of biodiversity proposals 76% of the time, although such funds represent only about 3% of all voting shares, according to the report.

“Moreover, nearly 20% of sustainability funds voted against biodiversity-related proxies, giving shareholders a reason to question whether they are being misled,” Planet Tracker wrote.

The new proxy-voting policies do address a longstanding problem about fund shareholders’ voices, but there are questions about how the programs will be implemented and whether asset managers are appropriately confronting the criticism they have faced from Republican groups, said Heidi Welsh, executive director of the Sustainable Investments Institute.

“There is a legitimate issue about putting money into pooled funds and then not having voting rights,” Welsh said. “On the other hand, it looks like a dodge [by fund companies]. Now they can say, ‘People can do whatever they want.’”

Sustainable investing organization As You Sow, which has its own proxy-voting programs for asset managers and individual stock shareholders, sees investor choice on voting as a positive development.

"Handing off votes to the underlying shareholders is a good thing," As You Sow CEO Andy Behar said. "Now that the technology exists, every asset manager should be required to hand it off."

However, the ESG-friendly voting options provided by ISS to fund shareholders don't go far enough on the sustainability or socially responsible fronts, Behar said. As You Sow's program, As You Vote, votes shares on behalf of participants much more frequently against board directors and auditors and more frequently for ESG-themed resolutions, he said.

A critical component of the asset managers' proxy-voting choice programs is whether shareholders have to opt in for voting preferences — and whether the firms’ own voting stances are the default is a question, Welsh said.

This year, “the votes are all down” on ESG-themed shareholder proposals, which “would argue in favor of the chilling effect from the right-wing pushback,” she said.

However, some decidedly anti-ESG shareholder resolutions, such as anti-racial-equity proposals, have also surfaced on proxy ballots this year. Those proposals have been shot down by wide margins, attracting only 3% of votes in their favor across the board, Welsh noted.