Dear Board Member,
As one of the world’s largest investment managers, each year State Street Global Advisors engages in dialogue with companies about a variety of issues critical to long-term performance – from business strategy to independent board leadership to sustainability. This year we will continue our active engagement with boards on sustainability, but also use our proxy vote to press companies that are falling behind and failing to engage.
ESG: No Longer an Option for Long-Term Strategy
Three years ago, we first called on boards to consider sustainability across the environmental, social and governance (ESG) spectrum. Having already engaged with companies on a number of governance matters for many years, we see that shareholder value is increasingly being driven by issues such as climate change, labor practices, and consumer product safety. We believe that addressing material ESG issues is good business practice and essential to a company’s long-term financial performance – a matter of value, not values.
Sustainability Report Card: Mixed Results for Companies
Over the course of thousands of engagements we have seen some progress. Many directors now acknowledge the importance of ESG issues and understand how it will impact the flow of capital to their companies. Boards more clearly appreciate that issues such as climate change pose risks to their businesses. Directors see that intangible issues such as corporate culture are long-term value drivers – and are aware that shareholders, employees, customers, suppliers, and communities alike are factoring these issues into their decision-making. We have also seen companies respond to our call. For example, our Fearless Girl campaign in which we used our voice and vote to encourage companies to increase gender diversity on their boards resulted in 583 companies adding women to their boards or committing to doing so.
Unfortunately, fewer than 25% of the companies we’ve evaluated have meaningfully identified, incorporated and disclosed material ESG issues into their strategies. Meanwhile, some shareholder activists continue to focus on specific or narrow ESG issues in piecemeal fashion – often creating confusion for investors, boards and company leadership without fundamentally tackling the ESG issues material to long-term shareholder performance.
R-Factor™: A New Lens into Company Performance
To begin addressing ESG in a more comprehensive way, this past year we launched R-Factor (the ‘R’ stands for Responsibility), a transparent scoring system that measures the performance of a company’s business operations and governance as it relates to financially material and sector-specific ESG issues. Drawing on data from four leading providers and leveraging the Sustainability Accounting Standards Board (SASB) materiality framework, R-Factor generates unique ESG scores for over 6,000 listed companies globally and allows us to evaluate a company’s performance against both regional and global industry peers. Indeed, following our endorsement of SASB’s materiality framework as the foundation for R-Factor, a growing number of companies and investors are now using it to guide their ESG public reporting. This is an important development, as the industry seeks to coalesce around common metrics and reporting conventions.
We now use R-Factor to help clients understand their portfolio exposures, as well as inform our own asset stewardship engagements and investment decisions. Key influencers like Bloomberg and SASB have also been using R-Factor to develop industry-specific ESG indices. We believe a company’s ESG score will soon effectively be as important as its credit rating.