R-Factor is an environmental, social and governance (ESG) scoring system developed by State Street Global Advisors (SSGA) where "R" stands for responsibility. The asset manager plans to start penalizing big companies that data indicate are "consistently underperforming" in these areas.

SSGA says its proprietary 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. The R-Factor has two components: ESG and corporate governance.

Background

Formed in 1978, SSGA is one of the world's largest index fund providers and manages assets worth $3.1 trillion. It is the investment management business of financial holding company State Street Corporation. 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.

In a letter sent to boards ahead of proxy season in Jan. 2020 and viewed by the Financial Times, 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."

"R" or Responsibility Factor

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.

Source: SASB
Source: SASB.

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."