As companies increase their communication on their Environmental, Social and Governance (ESG) actions, there has been a proliferation of ratings and rankings that attempt to assess performance. Inconsistent reporting practices, however, make it difficult to gain a clear picture that can be useful in investment decisions.
Two recently developed tools aim to cut through the noise and allow investors to better assess and compare company ESG performance.
State Street Global Advisors (SSGA) has created the “R-Factor,” a new scoring system to deliver consistent high-quality data that can be used as the foundation for investing. R-Factor uses SASB to identify the environmental and social metrics and themes that impact a company’s long-term performance as well as market-specific corporate governance codes developed by investors or regulators.
Meanwhile, the World Bank Group’s International Finance Corporation (IFC) recently launched their Operating Principles for Impact Management to measure “impact investing” that seeks to positively impact society by “choosing and managing investments to generate positive impact while also avoiding harm.”
Knowing the tools investors are actually using can help companies focus on the relevant ESG ratings and rankings that enhance corporate reputation and credibility, and expand their investor base – and thus allow them to allocate resources more appropriately and efficiently.
Zooming in on Social
A clearer picture on ESG performance also appears likely to further increase attention on the “S” or Social component of company practices. SSGA recently noted that investors are “highlighting the impact of culture, purpose and stewardship on a company’s long-term strategy and success.” The emphasis is reflected in increasing shareholder support for diversity proposals and state legislation to promote gender diversity, including a new law adopted in California and a recently introduced bill in New Jersey.
Companies are taking notice. Labrador’s research shows more companies are mentioning social issues in their proxies. Of 100 S&P 250 companies benchmarked, 37% discuss human capital management.
Textron, for example, has tied a portion of its CEO’s compensation to specific diversity goals while Verizon has linked 5% of executive bonuses to having at least 58.9% of its U.S.-based workforce comprised of minority and female employees and at least $4.6 billion of its overall supplier spending going to minority- and female-owned firms.