State Street Global Advisors will continue to actively engage with companies on sustainability but also use its proxy power against companies "that are falling behind and failing to engage," this proxy season, President and CEO Cyrus Taraporevala said in an annual letter to corporate boards Tuesday.
Saying that ESG "is no longer an option for long-term strategy," Mr. Taraporevala warned corporate board members that "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.
"Beginning this proxy season, we will take appropriate voting action against board members at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100, DAC 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," Mr. Taraporevala wrote.
The R-Factor scoring system was launched last year by SSGA, the $3.1 trillion asset management arm of State Street Corp., to measure company performance in business operations and governance related to financially material and sector-specific ESG issues.
While engagement has led to some progress and many directors now acknowledge the importance and impact of ESG issues, the results so far are mixed, Mr. Taraporevala said, with fewer than 25% of companies evaluated by SSGA identifying, incorporating and disclosing material ESG issues into their strategies "in a meaningful way."
SSGA also published an ESG oversight framework for company directors "that removes some of the ambivalence directors have about overseeing ESG," he said.
By 2022, companies that consistently underperform peers on R-Factor scores for multiple years will see expanded voting action because "it is in the best interests of investors and companies alike," Mr. Taraporevala wrote.