In a bid to address widely divergent environmental, social, and governance metrics favored by different stakeholders and the fact that ESG ratings agencies use different (and in many cases inaccurate) data, State Street Global Advisors is implementing a new scoring system that combines what it considers financially material metrics with parallel data from certain ESG data providers.
State Street views ESG information as key to creating long-term value for customers, but it notes “many companies aren’t disclosing a lot of ESG information” and that which is disclosed “isn’t always material to their industry or particularly helpful to investors.”
A common accepted framework for which information is material and should be reported is needed, according to State Street. It acknowledged that such a framework needs to be cost effective for companies in terms of data gathering.
The R-Factor: State Street’s scoring system is called the “R-Factor” (R stands for responsibility to investors.)
- For environmental and social issues, it combines the Sustainability Accounting Standards Board’s (SASB) materiality framework and maps the data of three different ESG data providers to those metrics. One shortcoming is that it is unclear whether the data used is accurate, which is often a criticism of ESG ratings data.
- For governance issues, State Street generally uses country-specific regulatory or investor-created governance codes.
New system used in investment and engagement: State Street notes that it is already sharing R-Factor scores with its portfolio companies and encouraging companies to report the data directly that it views as material.
What it means: It appears State Street intends its approach to encourage companies to self-report the data that powers the R-Factor score. However, it is not clear that what State Street views as material will be consistent with how other investors evaluate ESG data, and certain investors have even argued that the SASB Framework is too broad.
