Data: Breaking Down ESG’s Final Barrier
When it comes to data about a company’s ESG practices there are significant barriers to quality. Currently, governments around the world don’t require firms to report on most ESG data. Companies are left to determine for themselves which ESG factors are material to their business performance and what information to disclose. To address these issues, State Street Global Advisors has built its own scoring system, R-Factor.
How SSGA's R-Factor™ Solves the ESG Data Challenge
To address these issues, we built our own scoring system, R-Factor, with 3 key goals in mind:
- Bring greater transparency to the materiality considerations that drive ESG scores.
- Develop ESG scores that are based on frameworks supported by a large number of investors.
- Promote stewardship and incentivize greater disclosure of investor-relevant ESG information.
R-Factor is built off a transparent scoring methodology that leverages the Sustainability Accounting Standards Board (SASB) Materiality Map, corporate governance codes and inputs from four best-inclass data providers, and draws on our extensive stewardship and investment expertise.
R-Factor gives investors the ability to invest in ESG solutions that integrate financially material ESG data while incentivizing companies to improve their ESG practices and disclosure in areas that matter.
Why Data Matters
When it comes to data about a company’s ESG practices there are significant barriers to quality. Currently, governments around the world don’t require firms to report on most ESG data. Companies are left to determine for themselves which ESG factors are material to their business performance and what information to disclose. With investors increasingly viewing material ESG factors as being critical drivers of a company’s ability to generate sustainable long-term performance, asset owners and their investment managers need solutions to these data challenges.
The Problem with ESG Data
Lack of standardization and transparency in providers’ data collection and scoring methodologies pose key challenges for investors.
ESG data providers generally develop their own sourcing, research and scoring methodologies.
As a result, the rating for a single company can vary widely across different providers. MSCI and Sustainalytics are two of the most widely used ESG data providers. But our research revealed a correlation of only 0.53 among their scores, meaning that their company ratings are only consistent for about half of the coverage universe.
These differing methodologies have real implications for investors. Investors are, in effect, aligning themselves with a provider’s ESG investment philosophy in terms of data acquisition, materiality, aggregation and weighting.
By relying on an ESG data provider’s score, asset owners are also taking on that provider’s perspectives without a full understanding of how they arrived at those conclusions.
We believe that R-Factor is the change needed for ESG to become an integral part of the financial system. For more on R-Factor and our ESG investment capabilities, please visit our website.
