“Ideally, you want to have 30 to 50 years of data to look at – the smart beta factors which persistently drive return. These classic smart beta factors such as value, quality and low volatility are proven over time but ESG, is not specifically, smart beta. It hasn’t been proven to the same level of rigour as smart beta,” Reif says.
“For it to be statistically relevant you want to have more than 10-years worth of data.”
He says SSGA, which is the investment division of asset management behemoth State Street Corporation, believes ESG is here to stay and is a significant risk factor for companies. More pertinently, companies that have embedded ESG principles into their business are outperforming those that have not.
Responsibility factor
Bearing this in mind, SSGA have built an “R” or responsibility factor into its metrics, which is designed to focus on the financially material factors of a company in respect of its “R” score.
To work out the score, SSGA first look at how financially material environmental and social issues are that “we believe are industry specific, but market agnostic”.
“You want to look per sector and see what drives each of the individual sectors. You don't apply the same E and S, the same factors for all industries. So, product life-cycle might be relevant for the IT sector, but less relevant for coal.
“However, governance is a bit tricky, it’s industry agnostic, but market specific.
“What we’ve done, is work with a number of best-in-breed data providers to uncover an R-score and then applied it to the Sustainability Accounting Standards Board’s definition of materiality,” Reif says.
Offering insight
As to what the SASB’s materiality framework actually entails, Reif says “it’s a bunch of guys out of the United States that have created a framework for how to look at companies, that is unique, to each particular industry”.
He says companies can choose to ignore the R-score but “they’re choosing to ignore suggestions, of things we think are financially material”.
“Moreover, we’re offering them insight through a transparent framework that’s supported by trillions of dollars of investments under management. The SASB framework, is not unique to us, it is globally-accepted.”
He says companies that have embedded ESG principles into their business are generally well-managed, high-quality companies.
“By betting against ESG, it’s almost like, you want to bet on a crook and maybe that will provide you with a short-term return but it’s likely to come back to haunt you.”
