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State Street boss says facts ‘left aside’ in attacks on ESG funds

Republican politicians leading a backlash against climate-conscious investing “have left facts aside” and lost sight of the needs of long-term shareholders, according to the head of State Street, one of the world’s largest index fund managers.

State Street is among the financial firms under pressure from US Republican politicians over its use of environmental, governance and social factors in investing.

The Boston-based group was pilloried alongside BlackRock at a seven-hour hearing held by Texas state legislators last month, while the Texas treasurer included 10 State Street exchange traded funds on its list of investment products targeted for divestment.

Republicans in Congress are also promising hearings and probes of the largest financial groups over their climate policies.

“Everybody seems to have left facts aside,” Ron O’Hanley, State Street chief executive, told the Financial Times in an interview. “It’s become a convenient way to distort the facts and win votes.”

“For us it is not a political issue. It is nothing more than the proposition that climate needs to be incorporated into our investment risk framework,” O’Hanley said.

Unlike its indexing rival Vanguard, which dropped out of the main financial alliance on climate change last autumn, State Street’s asset management arm has committed to making the group’s $3.5tn in assets under management carbon neutral by 2050 or sooner.

“For us it is a matter of value, not values,” O’Hanley said. As index fund providers, “we are the longest of long-term investors, and over that timeframe, we [tell directors that we] expect you, the board, to incorporate climate into your governance . . . No one seems to question us when we say interest rates going up or down or GDP going up is an investment risk factor.”

But O’Hanley said he believes that investment in the transition to cleaner energy will continue. “I am fairly confident that most elected officials, no matter what party, state or district they represent, will welcome the associated jobs and economic impact,” he said.

Climate is just one area where the US political wrangling is creating problems for investors, O’Hanley said.

A rapid decline in immigration over the past few years has intensified labour shortages that will worsen as Americans age. The US issued just 25,000 intercompany transfer visas in the 2021 fiscal year, down by two-thirds from 2019, and overall immigration is also sharply down.

“The uninterrupted pipeline of talent that was coming in has now been effectively stopped . . . We are losing that talent,” O’Hanley said.

He said: “We cannot let another session of Congress go by with inaction on immigration reform and border security.”

State Street, which also runs a large US custody bank, is starting to prepare to help clients deal with fallout from political deadlock over the US debt ceiling. Washington is already having to take “extraordinary measures” to meet its financial obligations and will default later this year if Congress fails to approve an increase to the amount the US can borrow.

“The biggest uncertainty is around the US debt ceiling and how far this thing will be pushed,” O’Hanley said. “This could be catastrophic . . . It could create extraordinary volatility, and liquidity will retreat.”

“The idea that you are going to take the gold or platinum standard of the US full faith and credit and make it uncertain is just crazy,” he said.

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