R-Factor is a proprietary Environmental, social and governance (ESG) scoring system developed by financial holding company State Street Corporation’s investment management business. State Street Global Advisors (SSGA) announced that it is going to start penalizing big companies “consistently underperforming” according to its R-Factor scoring system, where “R” stands for responsibility.
In a letter sent to boards ahead of proxy season and viewed by the Financial Times, State Street Global Advisors (SSGA) said it will “take appropriate voting action” against board members at these companies if they can’t explain how they plan to improve their scores. The companies being scrutinized are listed on exchanges in the U.S., Japan, U.K., Australia, Germany and France.
“Ultimately, we have a fiduciary responsibility to our clients to maximize the probability of attractive long-term returns — and will never hesitate to use our voice and vote to deliver better performance for them,” said Cyrus Taraporevala, SSGA chief executive, in the letter. “This is why we are so focused on financially material ESG issues.”
Formed in 1978, SSGA is one of the world’s largest index fund providers and manages assets worth $3.1 trillion. Its stewardship activities have focused on gender diversity and climate change the last few years. It’s also the company that commissioned the famous “Fearless Girl” bronze sculpture in New York’s financial district a year after launching the gender diversity SHE ETF.
“R” or Responsibility Factor Explained
SSGA says its proprietary ESG scoring system measures the performance of a company’s operations and governance as it relates to financially material ESG challenges, and provides a roadmap to firms looking to improve. It is meant to fill the need for high-quality ESG data and a standardized, transparent method to assess long-term sustainability. It has two components: ESG and corporate governance.
The system sources data from four different providers – Sustainalytics, ISS-ESG (formerly Oekom Research), Vigeo-EIRIS, and ISS- Governance – to improve overall coverage and remove biases inherent in existing scoring methodologies.
Of all the data collected, only parameters that have demonstrated links to sustainable long-term value creation are used. A framework developed by a non-profit called the Sustainability Accounting Standards Board (SASB) is used to identify what metrics are financially material for an industry. The SASB Materiality Map includes 26 issues (see image below) under five categories including environment, social capital, human capital, business model and innovation and leadership and governance issues.
Relevant country-level corporate governance codes are also incorporated in the system to provide market specificity.
“We’ve dedicated significant time and resources to developing R-Factor because of our belief in the value of ESG integration across investment strategies,” said Rakhi Kumar, Head of ESG Investments and Asset Stewardship at SSGA. “By sharing R-Factor scores and educational ESG resources with portfolio companies, and developing investment solutions powered by the system, we are enabling investors and companies to help us build more sustainable capital markets for the future.”