State Street acts on racism and inequality

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If a high EQ extraterrestrial being observed our planet in fast forward, they would, I imagine, take special note of our species’ turbocharged technological evolution. For our prowess over the particles that comprise our home — splicing DNA, burning dead dinosaurs to fire pistons, harvesting metalloids for computing power — yes, but possibly even more so for the gaping gulf between our technological and moral evolution.

Climate change’s causes and solutions hinge on major technical elements, of course, but the causes and effects of a changing climate are a manifestly moral problem that technology alone can’t possibly resolve.  

Much necessary attention has recently been given to the financial services industry’s massive influence on the technical realm of climate solutions — at least as measured in portfolio emissions, underwriting adjustments and loan book decarbonization. But what about its role in addressing racial inequities and systemic injustices in its services and employment? After all, the fights against climate change and racial injustice are deeply intertwined. 

It’s been nearly two years since, following the murder of George Floyd, the U.S. industry trade group SIFMA, The Securities Industry and Financial Markets Association, and its banking and asset management membership firms took a stand for equality and justice — so where are we now?  

Financial services a laggard in addressing racism

The racial inequities that permeate our “morally bankrupt” financial system, as the United Nations Secretary-General recently described it, are a fundamentally moral problem. Still, there are plenty of metrics to measure the business case for diversity of many stripes: an increased capacity to innovate, improved decision-making processes and increased returns among them. 

The fact that advocating for racial equity within the financial sector must be made to fit into a rational, profit and loss lens to gain credence I guess speaks to the moral bankruptcy of the broader system, but financial firms have had much to say about diversity, equity and inclusion (DEI) ambitions during the pandemic era. 

The sentiments of those affected by the systemic racial injustices from the sector don’t, unfortunately, corroborate those commitments. 

Edelman conducted three in-depth surveys with general population respondents (demographic communities: White; Black; Latinx; Asian) during 2021 about the state of systemic racism in the U.S., with the aim of helping its clients address historical and systemic racial inequities. 

No sector was judged as doing particularly well — “Sports” scored the highest at 44 percent — in addressing racism and racial inequality, but the financial services industry was consistently identified as the least trustworthy. To the question of “How well are each of the following industry sectors currently doing when it comes to addressing the problem of systemic racism and racial inequality in their industry,” 33 percent of respondents responded positively. 

Following the money, or the representation behind the money, the picture isn’t any rosier. For example, in the U.S. House Committee on Financial Services’ “Diversity and Inclusion report: Holding America’s Largest Investment Firms Accountable” (December), it was found that “the diversity and inclusion of investment firms did not increase substantially,” and that when it came to the executive workforce, representation for people of color saw “an increase of only one percentage point.” 

State Street on a promising path

The total count of assets managed by diverse-owned investment firms is disproportionate to the number of diverse-owned firms, which is itself an issue. For example, the representation of minority-owned firms is relatively high in the mutual fund industry, at 9.1 percent — but when measure by AUM, minority representation in mutual funds is just 0.4 percent. 

But in the world of the mega-money managers, State Street — the second largest custodian bank and fourth largest asset manager in the world — has a robust set of initiatives in place to address both racism and inequality across the 40,000-person-strong firm and within its services. 

State Street’s approach to DEI action is, I think, worth highlighting in a world of frequent but often flimsy commitments and performative social media posts, especially considering how its approach truly touches on the core business. 

First off, it’s difficult to be what you can’t see. The firm is leaning into 10 Actions Against Racism and Inequality to build equity into the business, paying specific attention to the talent pipeline in Black and Latinx candidates. From the top-down view, State Street increased its board diversity by 25 percent in 2021. 

In its stewardship efforts, which many major asset managers have emphasized as a primary means of addressing climate-related issues within companies, State Street Global Advisors has committed to voting against portfolio companies in 2022 that don’t have at least one director from an underrepresented racial or ethnic community. This is in addition to the asset manager’s commitment to take voting action against companies that do not meet the disclosure recommendations from the Task Force on Climate-related Financial Disclosures.

Getting deeper into the core of the business, State Street has begun to notably increase its spend with diverse suppliers, holding the firm accountable for strengthening Black- and Latinx-owned businesses it works with. This includes a recent issue of $1.5 billion of debt, structured in keeping with State Street’s ongoing DEI efforts. 

Four bookrunning and co-managing firms are Black-owned investment firms, and collectively, those investment firms have underwritten almost half of the debt securities in the issuance.

“The partnership with these highly regarded Black-owned businesses allows us to amplify our impact as an organization by improving diverse representation within our industry,” said Eric Aboaf, chief financial officer of State Street Corporation.

Systemic racial inequities — in health and wealth alike — have been made abundantly clear in the past two years of the pandemic, and at the same time research shows that work by U.S. companies to follow through on their racial equity pledges has stalled.

State Street’s approach to using its power, voice and capital to build a more just economy and society via the “10-Point Action Plan” is noteworthy in both its level of transparency and measurable ambition, substantively breaking down barriers, creating room for growth and bringing the entire institution into the journey toward equity. 

There is, of course, much, much room to grow. The financial services sector needs to keep on counting its impact as measured by carbon, but it critically needs to double, or triple, down on its imperative to build trust and open opportunities for those who count it — and, especially, those who don’t — as a trusted actor in society.