Another investment giant becoming more active on ESG

State Street Global Advisors (SSGA), one of the world’s largest fund managers, with $3.1T assets under management, is preparing to pursue a more aggressive engagement strategy to get portfolio companies in line on ESG.

In his annual letter to CEO’s, SSGA President and CEO Cyrus Taraporevala, announced that the investor will begin using its proxy vote this year to pressure companies that are falling behind on sustainability standards.

ESG essential to long-term returns

Mr. Taraporevala states in his letter that SSGA’s renewed ESG push is not just a matter of instilling values, but is essential to long-term returns, writing:

“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.”

The SSGA seems to be part of a new trend by large investors to increase engagement on ESG. Earlier this month, BlackRock CEO Larry Fink, in his own letter to CEOs, outlined steps the investment giant would begin taking on ESG, including exiting coal investments. Mr. Fink also expressed his view that there is a strong link between sustainability and investment returns, writing, “Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors, and with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”

Corporate sustainability performance “mixed”

According to SSGA’s Taraporevala, company performance on ESG issues has been mixed. Fewer than 25% of the companies the firm has evaluated have meaningfully identified incorporated and disclosed material ESG issues in their strategies. SSGA also gives poor grades to shareholder activists, stating that they tend to focus on narrow issues, “without fundamentally tackling the ESG issues material to long-term shareholder performance.”

New ESG rating standard

SSGA has recently launched R-Factor, a new ESG scoring system to evaluate companies’ operations and governance, as it relates to ESG issues. The new system relies on data from several leading ESG information providers, and the Sustainability Accounting Standards Board (SASB) materiality framework. SSGA notes that companies and investors are beginning to use R-Factor to guide ESG public reporting, and that Bloomberg and SASB are also using R-Factor to develop industry-specific ESG indices.

Taraporevala notes the importance of the development of standardized ESG metrics and reporting conventions, stating his belief that “a company’s ESG score will soon effectively be as important as its credit rating.

Using proxy voting power against laggards

Using R-Factor as a basis for sustainability performance, SSGA will begin this year to use its proxy voting power, voting against board members of companies that have been consistent ESG laggards and look unlikely to meaningfully change. For other companies that are struggling with ESG issues, but show a desire to take action, SSGA will continue its practice of engagement to incorporate sustainability into those companies’ long-term strategies.