State Street Global Advisors has developed R-Factor, a proprietary ESG scoring system that seeks to address issues faced when using external ESG data providers, according to Benjamin Colton, Tokyo-based head of Asia-Pacific asset stewardship.
“There are ESG data challenges, which include the lack of transparent frameworks and little correlation between the different ESG scores,” Colton told FSA in a recent interview.
Colton, who joined SSGA a year ago from Norway’s sovereign wealth fund (NPF), explained that the ESG data providers make use of different definitions when considering the materiality of the different metrics that go into their scores. In addition, he believes that they often lack transparency, in which investors and companies find it difficult to determine how the scores were generated.
“This means there is an increased risk of using only one data provider,” he said.
Other fund managers, including BNP Paribas Asset Management, Schroders, Hermes Investment Management and Pictet Asset Management, have also highlighted various limitations of third-party ESG data.
Colton said SSGA’s scoring system makes use of the different ESG data providers and only takes the metrics that are considered “financially material” by the Sustainability Accounting Standards Board’s (SASB) materiality map.
For example, only 91 out of 180 metrics provided by a data provider is considered material by the SASB. SSGA then takes those 91 metrics and only apply the most relevant ones into a specific industry. Taking the household and personal products industry, only 26 metrics are used.
The tool makes use of Sustainalytics, ISS-Oekom and Vigeo-EIRIS for environmental and social data, while ISS-Governance is used for governance data. It also draws on insights from the firm’s stewardship team and incorporates them into the system.
Colton added that the tool separates environmental and social metrics from governance ones.
Environmental and social scores are determined by how a company compares to global industry peers. Governmental scores are generated depending on where the company is operating.
“When we think about environmental issues such as climate change or carbon emissions, that transcends geographical boundaries, so it doesn’t matter if you are in Asia-Pacific or in the Americas.
“On the governance side, governance practices are different from country-to-country, so we take into account those market nuances,” he said, adding that the firm compares a company’s governance practices to its country’s local governance code.
ESG integration appears to be catching on. Firms have defined clear AUM targets. For example, BNP Paribas decided this year to integrate ESG factors into all of its managed funds by 2020, while Amundi announced last year a three-year action plan that will integrate ESG analysis across all of its funds by 2021.
SSGA has had ESG integrated solutions, but it has been mainly an exclusionary approach.
Of the $2.8trn that the firm manages globally, around $200bn is considered to have integrated ESG factors, according to Colton.
The tool will be used across the firm’s investment teams, Colton said, but he could not give a timeframe for company-wide integration.
Colton believes the firm’s engagement with company management will benefit.
“When we meet with companies, a lot of times they do not understand the factors that are driving the ESG scores provided by different providers. It’s somewhat like a black box.
“So we are able to go in and say, here is exactly the framework that we are using to drive your scores and point out what areas they should improve on.”
This is especially useful when engaging with mid-to-small-cap companies, which often do not have the resources or large sustainability teams to determine what to improve on, he added.
Asset management stewardship, which includes engagement and voting, is one of the most important ESG activities, according to a Willis Towers Watson report.
However, while active managers have been putting in more effort into stewardship, a majority of passive managers haven’t followed, Luba Nikulina, London-based global head of manager research at Willis Towers Watson, said previously.
Exceptions are SSGA, Blackrock and London-headquartered Legal & General Investment Management, according to the report.
SSGA, for example, identified at least 1,200 companies globally that did not have a single woman on their board, according to the study. The study said the firm voted against the boards of directors of 500 companies each year in 2017 and 2018 that failed to adequate steps to address the issue. Partly in response to these efforts, 423 have so far added a female director.