Introduction. Earlier this week, we learned that State Street Global Advisors, or SSGA, has created and is currently applying its new Environmental, Social, and Governance (ESG) platform, known as “R-Factor,” to better inform its investment, engagement, voting, and other decisions regarding any given company. SSGA says that it built R-Factor, its own scoring system, because it believes that the current ESG reporting and scoring landscape lacks standardization and transparency. Moreover, SSGA found that differing methodologies used by the current ESG raters can lead to a variance in company scores. These differences can be critical as asset owners and investment managers seek consistent, comparable and material ESG-related information for their investment analyses.
What Goes into the New Scoring Tool? An April 2019 SSGA article provides further insight into which resources SSGA is actually using to generate its R-Factor score for any company. The information provided is more specific than the information in its 2019 Global Proxy Voting and Engagement Guidelines for Environmental and Social Issues published in March 2019, which we previously covered.
For environmental and social scoring, R-Factor leverages the Sustainability Accounting Standards Board (or SASB) Materiality Map as the key framework for materiality. SSGA writes that, “The R-Factor scoring model is powered by multiple best-in-class ESG data providers — Sustainalytics, Vigeo EIRIS, Institutional Shareholder Services (ISS) Governance and ISS Oekom — as well as SASB meta-data for categorizing and weighting.” SSGA uses another in-house proprietary tool for governance scoring that takes into account region- or country-specific norms. State Street has stated in other publications that it utilizes the Task Force on Climate-related Financial Disclosures Framework (known as TCFD) and that CDP’s (formally the Carbon Disclosure Project) Framework is another possibility.
Why It’s Important? Knowing which providers their investors are actually using is important to companies because, generally speaking, high performance on the relevant ESG ratings and rankings could enhance corporate reputation and credibility, and expand their investor base. With the current overcrowding of ESG related products, which collectively is estimated to be in the hundreds worldwide, having more transparency on which ones their investors use enables companies to allocate resources more appropriately and efficiently.
Relevant Background. Our prior client memorandum provides an overview of several ESG reports and ratings, as well as information on ESG-related funds and portfolios offered by nine asset managers that are based in part on these ESG reports and ratings.