In its annual letter to boards sent yesterday, State Street Global Advisors, the $3 trillion-plus investment arm of State Street, redefined what it considers “shareholder value.”
The letter is signed by Cyrus Taraporevala, CEO and president of the Boston-based investing giant. With it, he includes a suggested environmental, social and governance (ESG) oversight framework designed for company directors who are still trying to get their heads wrapped around ESG and what it means.
As if Milton Friedman hasn’t been rolling around in his grave enough already, Taraporevala goes on to argue that shareholder value is increasingly driven by challenges such as climate change, labor practices and consumer product safety.
Responding to these challenges is "a matter of value, not values," he contends, adding: "We believe that addressing material ESG issues is good business practice and essential to a company's long-term financial performance."
State Street Global Advisors first called on boards to consider sustainability across the ESG spectrum back in 2017 and has since engaged with a number of companies around ESG issues. The world's third largest asset manager also made its mark on the financial sector with efforts like the Fearless Girl campaign, which sought to increase the number of women on corporate boards.
Still, there’s plenty of work to be done. Less than 25 percent of the companies evaluated by the firm have genuinely "identified, incorporated and disclosed" material ESG issues within their overall strategies.
But the asset manager isn’t only wagging its finger and scolding — Taraporevala says it's willing to work with clients on these challenges. To that end, it launched what it calls the R-Factor tool, a risk scoring system that measures how companies are performing based on financially material as well as industry-specific ESG issues. The tool generates ESG scores for more than 6,000 listed companies globally, which State Street Global Advisors uses to help clients understand their portfolio risk exposure. Beginning this year, the asset manager will also use its proxy voting power to take action against companies with low ESG scores.
“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 for them,” Taraporevala asserted. “This is why we are so focused on financially material ESG issues.”
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Leon Kaye has written for 3p since 2010 and become executive editor in 2018. His previous work includes writing for the Guardian as well as other online and print publications. In addition, he's worked in sales executive roles within technology and financial research companies, as well as for a public relations firm, for which he consulted with one of the globe’s leading sustainability initiatives. Currently living in Central California, he’s traveled to 70-plus countries and has lived and worked in South Korea, the United Arab Emirates and Uruguay.
Leon’s an alum of Fresno State, the University of Maryland, Baltimore County and the University of Southern California's Marshall Business School. He enjoys traveling abroad as well as exploring California’s Central Coast and the Sierra Nevadas.
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