ASX100 ESG underperformers in global manager's crosshairs

One of the largest global fund managers will up the ante on companies by voting against directors of companies - including ASX100 companies - that are showing underperformance on material ESG issues.

State Street Global Advisors (SSGA) had previously announced that they "take action against" board members in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAX 30, and CAC 40 indices, based on their ESG performance as captured by SSGA's R-Factor scoring system.

SSGA's R-Factor scoring system measures company performance on environmental, social and governance grounds. Started with the 2020 proxy season, SSGA increased engagement with companies they consider laggards, and in the case of companies that they deemed "not committed to engaging with us or improving their disclosure or performance related to financially material ESDG matters", they voted against the re-election of independent directors.

That included ASX100 companies. In their 2020 asset stewardship report, SSGA noted that during 2020, they voted against directors in 14 companies that were identified as R-Factor laggards. Of these, seven companies (50%) were in the United States, five companies (36%) were in the United Kingdom, and two (14%) were in Australia.

"We did target companies in Australia, with particular focus on looking at director independence on key committees ,and independence of the board overall," said Benjamin Colton, global co-head of asset stewardship for State Street Global Advisors. "There is a lot of variation between some of the leading companies in Australia and some of the laggards with a lot less independence."

SSGA rates companies against its internal R-Factor ESG evaluation methodology, which covers more than 7,500 companies around the world. Laggards are companies that are considered to be in the bottom 10% on performance against the R-Factor.

"There is a bias towards larger companies, which  may have larger sustainability teams and are better at reporting in general," Colton said. "[Starting with the laggards] was a pretty low bar in terms of, if you are a laggard in a major index, we really want to focus in on your ESG disclosure and performance."

SSGA will expand its intentions to vote against reelection of board directors to capture not just laggards but ESG underperformers as well - companies that are not at the bottom on ESG performance, but who are not performing as well as peers or who are not showing progress on material ESG indicators.

"The underperformers are the next tranche up, representing the bottom 30% of the R-Factor universe," Colton said. "It expands the number of companies and we'll be looking at those with consistent underperformance or have shown that they have not improved the R-Factor score, or their score has dropped. We wrote letters in 2021 saying you are an underperformer, and your score has decreased, and if it continues to decrease up to 2022, that will be a trigger for us."

SSGA is holding directors accountable for oversight of material ESG issues, Colton said.

"We think the director vote is the most effective mechanism for making an impact, and we think that directors should have oversight of key ESG issues," he said.

ASX100 companies will be feature in that next level of engagement around underperformance, Colton said.

"On the climate side, look for us to be more articulate on what we consider quality transition plans, and we will be a lot more explicit on seeking quality disclosure beyond the TCFD report," he said. "We are laser focused on engaging with targeted companies around what we consider to be quality transition plans."

Colton expressed concerns with recently announced say on climate votes, saying SSGA thinks "it's going to be more effective to hold directors accountable for oversight."

"When it comes to say on climate votes, especially in the US, we've expressed concern," Colton said. "We think an advisory vote on transition plans could have unintended consequences on insulating board members and creating complexity. It might create a risk of the rubber stamping for these plans. We are directionally aligned with the overall objective for enhanced climate disclosure - disclosure is paramount for investors, but rather an annual advisory vote, a better solution is to be clear on what the expectations are, the company should disclose in alignment, and we should follow up to make sure they're following through and hold them accountable. We think that might be more effective than an advisory vote."

SSGA has also identified human capital management as a material engagement going forward. This covers issue of diversity and inclusion, occupational health and safety, employee engagement and other issues.

"We think there is going to be a plethora of human capital related disclosure," Colton said. "The quality and quantity is going to explode in the next six to 12 months. When you think about employee voice, for example, there is a link between employee voice and high performing workplaces and with corporate culture."

"Are surveys uncovering systematic hotspots within an organisation, and what happens when a company has identified hot spots that need to be addressed?"

SSGA is developing its approach to human capital management, which includes identifying key metrics for measurement. The focus on racial and ethnic diversity is an extension of the existing Fearless Girl campaign, Colton said.

"Fearless Girl was a push for cognitive diversity," he said. Gender is an observable characteristic that is a good proxy, or instrumental variable, for cognitive diversity. But we know that there are so many dimensions of diversity, and it can be so different in different jurisdictions.

"As we see that racial and ethnic diversity become increasingly material systemic risk factor as well, we want to understand how companies are addressing racial and ethnic diversity."

SSGA will start with engagements on human capital management in the US and UK, but is surveying Australian companies as part of its underlying research process, Colton said.

Read more: SSGAESGASX100State Street Global AdvisorsBenjamin Coltonproxy vote