State Street Global Advisors (SSGA) has developed a system for scoring companies on ESG practices that aims to help boost the ESG narrative in capital markets.
‘R-Factor will benefit understanding of ESG issues on the part of both companies and investors,’ Rakhi Kumar, head of ESG investments and asset stewardship at SSGA, tells IR Magazine. ‘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.’
There are two components to the score system: an ESG component and a CorpGov component. The ESG component draws in raw metrics from three data providers – Sustainalytics, Vigeo Eiris and ISS ESG – and leverages the Sustainability Accounting Standards Board’s (SASB) materiality framework to identify the financially material raw metrics to be considered in the scoring process.
‘In total, we start from a universe of more than 2,000 raw metrics from the three data providers, of which only 480 metrics are considered relevant to the SASB framework,’ explains Kumar. ‘The ESG component of a given company’s score is powered only by the specific general issues that SASB defines as financially material by industry, which tends to be a much smaller subset of the metrics. Considering multiple data sources for the ESG component of the score increases the coverage of companies and removes biases or noise in the ESG data.’
The CorpGov component considers more traditional corporate governance topics, drawing on raw metrics from governance data provider ISS Governance and maps them to region-specific corporate governance codes that have been developed by regulators or investors.
‘This is because corporate governance tends to be market-specific but industry-agnostic,’ Kumar says. ‘Adapting our model to different geographies allows for this market specificity, and honors differences in governance structures and business practices without placing judgment on those differences.’
She adds that the system will benefit IR professionals: ‘R-Factor is a powerful tool for IR teams. Because IROs will have transparency around what powers a company’s R-Factor score, they can use this as a tool to communicate internally about what investors see as priority ESG areas for the company.
‘This allows them to begin conversations at the board and management levels about management of financially material ESG issues. It helps get the management and CFO buy-in that is needed to truly integrate ESG into a company’s business and strategy.
‘We expect small and mid-cap companies to especially benefit from R-Factor, because it offers clear, transparent guidance on how to improve the management and disclosure of ESG practices and simplifies current sustainability reporting processes, allowing more resource-constrained teams to meet investor expectations.’
The system has been 18 months in the making: in early 2017, based on a survey of the global ESG investing landscape, SSGA found that many institutional investors were concerned about the quality of ESG data.
Kumar explains: ‘On further research we found that there was low correlation between the ESG scores of different data providers, who used differing and opaque scoring methodologies. As an asset manager, we needed better ESG data to allocate capital to companies that are creating long-term sustainable returns.
‘We set out to create a mechanism that would be transparent to companies and investors and help them understand and report on financial materiality of ESG data, and also leverage existing commonly accepted ESG frameworks to inform the score. R-Factor is designed with these objectives in mind and is the mechanism to build more sustainable markets.’