State Street Global Advisors, the third-largest provider of ETFs, wants more companies to incorporate sustainability practices into their long-term business strategies and will consider such corporate efforts in its upcoming corporate proxy votes. Incorporating environmental, social and governance issues (ESG) into a strategy is good business and can reduce risks and increase opportunities, according to State Street, which manages more than $2.4 trillion in assets.
In order to prod companies to focus on sustainability, State Street CEO Ron O’Hanley has just released a letter it is sending to board members of the companies whose stocks it owns noting its increasing focus on corporate practices toward climate change, water management, supply chain management, safety issues, workplace diversity and talent development.
“We are convinced that addressing ESG issues is a good business practice and must be part of effective board leadership and oversight of long-term strategy,” O’Hanley wrote. ESG issues “can have a material impact on a company’s ability to generate returns.”
Attached to the letter is a framework that SSGA is using to evaluate companies’ sustainability efforts. It focuses on three criteria:
- Has the company identified material environmental and social sustainability issues relevant to its business?
- Has the company assessed and, where necessary, incorporated the implications of environmental and social sustainability issues into the company's long-term strategy?
- Has the company adequately communicated the company's approach to sustainability issues and its influence on strategy?
Companies are then categorized as Tier One if they satisfy all three criteria; Tier 2 for satisfying one or two criteria and Tier 3 for not considering sustainability issues at all.
“We believe that Tier One companies are positioning themselves for the long term ... [and] Tier Three companies are at greatest risk in the long term,” State Street notes. “When we believe that engagement alone is not effective, we will incorporate our assessment of a company’s approach to sustainability into our proxy voting decisions.”
According to the State Street framework, “Boards can play an important role in strengthening a company’s approach to sustainability and that it is for the board, as part of its oversight of strategy, to ensure that management consider, and communicate, how these issues affect long-term strategy, if at all.“
State Street has developed a series of six questions for corporate boards to help companies understand and adjust their approaches to sustainability, which include the first three questions noted above plus the following:
- Does the company consider long-term sustainability trends in capital allocation decisions?
- Is the board equipped to adequately evaluate and oversee the sustainability aspects of the company’s long-term strategy?
- Is the board incorporating key sustainability drivers into performance evaluation and compensation programs?
Of the 177 companies in its global portfolio that State Street evaluated in 2016, only 7% qualified as Tier One, 72% qualified as Tier Two and 21% fell into the Tier Three Category. Tier Two indicates a company has a sustainability program that is not integrated into its overall business strategies or hasn’t articulated how ESG factors affect long-term strategies, or provided relevant data on key performance indicators or established long-term goals that align with an ESG strategy.
State Street supported 46% of climate-related proposals at shareholder meetings last year, compared to zero at rival asset managers BlackRock Inc., Vanguard Group and Fidelity Investments, according to a review of public filings by investor environmental advocacy group Ceres and Fundvotes.com. In the 2012 proxy season, State Street supported about 13% of climate-related proposals, according to those groups.
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