Asset management goliath State Street Global Advisors has sent a hard-hitting letter to company boards warning it will not hesitate to use its proxy vote to press firms falling behind on their sustainability and ESG responsibilities.
In a letter sent to company board members this week, Cyrus Taraporevala, president and CEO of State Street, said the investment firm would be continuing its active engagement with boards on sustainability, but will also employ its proxy vote to pursue companies that are falling short and failing to engage.
“With R-Factor informing our decision-making, this year we are prepared to use our proxy voting power to ensure companies are identifying material ESG issues and incorporating the implications into their long-term strategy,” Taraporevala told board members in the memo.
Launched by State Street last year, R-Factor is a scoring system that measures the performance of a company’s business operations and governance as it relates to financially material and sector-specific ESG issues.
Beginning this proxy season, Taraporevala declared the firm will take appropriate voting action against board members at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAX 30, and CAC 40 indices that are laggards based on their R-Factor scores and that cannot articulate how they plan to improve their score.
“Beginning in 2022, we will expand our voting action to include those companies who have been consistently underperforming their peers on their R-Factor scores for multiple years, unless we see meaningful change. We believe doing so is in the best interests of investors and companies alike,” State Street warned.
According to Taraporevala’s letter, fewer than 25% of the companies State Street has evaluated have meaningfully identified, incorporated and disclosed material ESG issues into their strategies.
“Meanwhile, some shareholder activists continue to focus on specific or narrow ESG issues in piecemeal fashion – often creating confusion for investors, boards and company leadership without fundamentally tackling the ESG issues material to long-term shareholder performance,” Taraporevala added in his written communication.
However, he noted State Street had seen some progress over the course of the thousands of engagements it has carried out in recent years.
“Many directors now acknowledge the importance of ESG issues and understand how it will impact the flow of capital to their companies. Boards more clearly appreciate that issues such as climate change pose risks to their businesses.
“Directors see that intangible issues such as corporate culture are long-term value drivers – and are aware that shareholders, employees, customers, suppliers, and communities alike are factoring these issues into their decision-making,” Taraporevala penned.
In addition, the asset manager’s Fearless Girl campaign, which encourages companies to increase gender diversity, has resulted in 583 companies adding women to their boards or committing to doing so.
“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. This is why we are so focused on financially material ESG issues,” Taraporevala concluded.