This month, State Street Global Advisors (SSGA) became the latest high-profile asset manager to launch a proprietary ESG data tool, with the US giant saying it is focused on materiality and transparency.
UBS has built a propriety database of ESG metrics and BlackRock is starting to integrate World Bank data into its risk management Aladdin platform.
The market for ESG data is bubbling, with ESG research house Vigeo EIRIS becoming the latest research house to be snapped up, by Moody’s.
But despite the increasing convergence with mainstream finance, the ESG data space is still battling the perception of unreliability and inconsistency.
Another criticism is a lack of transparency.
UBS created its proprietary ESG tool as it did not want to rely on external ratings, given noted inconsistencies between them.
And on a webinar organised by Responsible Investor and Thomson Reuters last July, Rakhi Kumar, Head of ESG Investments and Asset Stewardship at SSGA, raised concerns about the ‘materiality black box’ of ESG data providers.
She said at the time: “In short, the lack of standardisation poses a real challenge for investment managers. In its absence, we have to do our due diligence on data.”
Now SSGA is putting its money where its mouth is, creating a tool that it says “reinvents ESG investing through a transparent scoring system”.
Responsible Factor or R-Factor has long been in gestation with support from the top of the firm.
In 2014, chief investment officer Rick Lacaille supported an initiative to help define the links between ESG and financial performance.
The so-called Project Delphi – which was initiated as far back as 2011 (RI coverage) – was not taken forward externally as the Sustainability Accounting Standards Board (SASB) became an emerging industry standard.
R-Factor is primarily based on SASB, the framework that identifies financially material environmental and social issues for 11 sectors and 77 industries that feed into a set of sustainability accounting standards, aligned with US securities law.
Using SASB as a starting point, R-Factor filters data from Sustainalytics, ISS-Oekom, Vigeo EIRIS and ISS-Governance to generate a unique ESG score for listed companies.
Going forward, SSGA plans to share scores with companies, so they can improve, and most importantly understand what are the material ESG factors they should report on.
This will address the data quality problem and remove opacity around ESG financial materiality in the scoring process, says Kumar.“If ESG information is financially material, which we believe it is, it has to be available and reported by companies for all investors in capital markets. It should be as accessible and as available as financial data. So we wanted to create a mechanism which would allow for companies to understand how we are viewing financial materiality.”
R-Factor is proprietary to SSGA and its clients, which includes major pension funds, but Kumar believes it will also have a positive effect on the wider capital markets by driving more efficient, standardised material ESG disclosure.
“R-Factor allows, especially for small and mid-cap companies, who don’t have the resources, to understand what is important to measure,” says Kumar.
How does this work in practice? Kumar explains that SASB’s metrics are used to identify what is material in ESG data providers’ metrics.
“For example, one of the data providers has 180 raw metrics that goes to create their score. We identified that only 91 are aligned to the SASB Framework. So we’ve already reduced materiality by half. And when it comes to the sector, for example household and personal products, only 26 metrics are relevant so that goes into its environmental and social score.”
This translates into a company in the household and personal products sector being encouraged to report on four ESG areas considered material: water and waste management, product quality and safety, product design and lifecycle management, and supply chain management.
For governance the score is based on geography. R-Factor has a framework that identifies and aligns material corporate governance metrics with different corporate governance codes around the world. For example, of 230 metrics provided by ISS-Governance, only 95 are relevant to companies under the UK’s Stewardship Code.
SSGA will shortly have a webpage where companies can request their score, free-of-charge.
A lack of transparency is a frequent criticism of the ESG ratings space, most recently articulated by French business groups that called for an ESG ratings agency code of conduct.
They called on ratings agencies to publish their detailed methodologies and detailed ratings, free-of-charge and for them to consider national legal, regulatory and market situations.
R-Factor has some of these elements. Kumar says: “It’s not a black box. We want companies to know their score and how they can improve. In a few years, you’ll start seeing impact. Our clients recognise this and there is a lot of excitement we’ve noticed amongst market participants about what this can really mean for capital markets.”