Via Financial Times

State Street’s $3.1tn investment arm is planning to start voting against the boards of big companies that lag behind on environmental, social and governance standards, a threat that is likely to reverberate in many corporate boardrooms. 

State Street Global Advisors, one of the biggest shareholders in many blue-chip companies thanks to its position as one of the world’s largest index fund providers, last year introduced what it calls a “responsibility factor” — a scoring system that measures how well companies do on various ESG metrics.

Starting this coming proxy season, SSGA will “take appropriate voting action” against board members at big US, UK, Australian, Japanese, German and French companies that are laggards based on this measure and “cannot articulate how they plan to improve their score”, according to a letter being sent out to boards this week.

Initially SSGA will focus on a smaller cohort of companies that are performing particularly poorly, but beginning in 2022 it will also start voting against the board members of all companies that have consistently underperformed their peers. 

“Ultimately, we have a fiduciary responsibility to our clients to maximise 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.”

Diversity, sustainability and climate change have moved towards the top of corporate agendas in recent years, with many investors demanding that companies do better on a wide variety of matters that fall under the ESG umbrella. 

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European investment groups have led the charge by targeting individuals over apparent ESG failings. Legal & General Investment Management voted against the election of 3,864 directors globally in 2018, citing climate change, diversity or other governance factors. UBS Asset Management and Allianz Global Investors have also increased their votes against directors over ESG-related concerns.

US fund managers have generally been more reluctant to take similar actions, but State Street said a related diversity push since 2017 has managed to get 583 companies to add or commit to adding women to their boards. Meanwhile BlackRock’s founder Larry Fink sent a letter this month to corporate executives arguing that “in the near future . . . there will be a significant reallocation of capital” because of the threat of climate change, in particular.

“Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Mr Fink wrote, saying that the $7tn-in-assets investment group would incorporate ESG fully into its investment framework and insist on companies disclosing sustainability-related metrics. 

SSGA’s “R-factor” is based on a system constructed by the Sustainability Accounting Standards Board, a San Francisco-based non-profit. In 2018 SASB rolled out an ESG disclosure framework designed specifically for investors, which has now been adopted by money managers with more than $30tn of assets. 

State Street sees the SASB’s framework as a minimum set of standards that companies should reach, and uses it together with other data inputs to rank companies both against local and industry peers. Companies can ask SSGA for their scores.

Tying the R-factor to how it will vote may help State Street shape the disparate ESG ratings industry. “We believe a company’s ESG score will soon effectively be as important as its credit rating,” Mr Taraporevala wrote.

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Some investment group executives have been concerned that embracing ESG too zealously might alienate some clients, or stir up concerns that the asset-management industry’s biggest players have too much sway in corporate boardrooms. 

Wary of being accused of over-reach, investment groups stress that improving ESG standards, especially with respect to climate change and diversity, is vital because of the real financial consequences for companies.

“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,” Mr Taraporevala said in his letter. 

Additional reporting by Attracta Mooney