State Street Global Advisors (SSGA) is running out of patience with boards that are not taking account of important ESG issues.
In a January 28 letter to directors, SSGA chief executive Cyrus Taraporevala warns that starting this proxy season the asset manager ‘will take appropriate voting action against board members at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAX 30 and CAC 40 indices that are laggards based on their R-Factor scores and that cannot articulate how they plan to improve their score.’
SSGA last year launched its R-Factor scoring system to measure the performance of a company’s business operations and governance in relation to financially material and sector-specific ESG issues. The system inputs the findings from several ESG data providers, overlays SSGA’s own research and maps all of the data to the Sustainability Accounting Standards Board’s definitions of materiality.
R-Factor generates ESG scores for more than 6,000 listed companies globally.
Taraporevala writes that, starting in 2022, SSGA will expand its voting action to include those companies that have been ‘consistently underperforming their peers on their R-Factor scores for multiple years, unless we see meaningful change. We believe doing so is in the best interests of investors and companies alike.’
Rakhi Kumar, head of ESG investments and asset stewardship at SSGA, said when the scoring system launched last summer: ‘R-Factor will benefit understanding of ESG issues on the part of both companies and investors. It puts companies in the driver’s seat. The transparent materiality frameworks offer clarity on the actions needed to improve practices and enhance companies’ scores. And it increases ESG integration into company strategy, offering clear guidance to boards and management teams on financially material ESG topics to focus on.’
SSGA’s diminishing patience with boards that are failing to act on material ESG matters comes after the firm has spent the last few years engaging with companies on many of these issues. Taraporevala acknowledges that there has been progress, writing: ‘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.’
But he says that fewer than 25 percent of the companies SSGA has evaluated have ‘meaningfully identified, incorporated and disclosed material ESG issues into their strategies.’
An important issue for SSGA has been board diversity. The firm reported last year that as of June 30, 2019, 43 percent of the 1,350 companies targeted by its Fearless Girl campaign had either added a female director to their board or committed to doing so. But many had not done so and the firm said that in 2020 it will vote against the entire nominating and governance committee ‘if we have concerns about the lack of gender diversity for four consecutive years and are unable to engage in productive dialogue.’
Taraporevala also expresses concern in his letter that some shareholder activists are focusing on specific or narrow ESG issues, which he says often leads to confusion for investors, boards and management without addressing the ESG issues material to long-term shareholder performance.
His letter – and the threat of voting against boards that are not keeping up with ESG demands – comes soon after the release of BlackRock chair and CEO Larry Fink’s latest annual message to CEOs, in which he writes: ‘Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable.
‘Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.’
BlackRock also plans to:
- Make sustainability ‘integral to portfolio construction and risk management’
- Exit investments that present ‘a high sustainability-related risk’, such as thermal coal producers
- Launch new investment products that screen for fossil fuels
- Beef up the firm’s ‘commitment to sustainability and transparency in [its] investment stewardship activities.’
