- Cutting-edge research identifies financially material ESG factors for investors
- Initial research suggests the new metric could guide investment decisions
SYDNEY, February 20, 2018 – Global asset manager Russell Investments has created another research breakthrough in ESG (environmental, social & governance) investing with a material ESG score, which more accurately identifies ESG factors that could impact the financial performance of publicly-traded companies. The research findings were released today in a paper titled Materiality Matters: Targeting ESG issues that impact performance. The paper presents evidence that these material ESG scores are better predictors of stock return compared to traditional, non-material ESG scores.
"Our new material metric allows ESG investors to differentiate between companies in a more precise way than a traditional ESG score," said Scott Bennett, director, equity strategy and research, at Russell Investments and an author of the research paper. "We can now distinguish those companies which score highly on ESG issues that are financially material to their business and profitability."
Bennett added that the relevance of ESG issues varies industry to industry and company by company, undercutting the effectiveness of a one-size-fits-all ESG scoring system. For example, fuel efficiency has a bigger impact on the bottom line of an airline than an investment bank.
"We have found that traditional ESG scores are composed of many issues that are not material to the business being scored," Bennett said. "Using a diverse market sample in the Russell Global Large Cap Index universe, we found that less than 25% of the data items in the traditional ESG score are considered material for two-thirds of all securities in the index."
To create the new scoring methodology, the research team began with the comprehensive ESG scores from data provider Sustainalytics—which are used for a wide variety of reasons beyond investment selection—and the industry-level materiality map developed by the Sustainability Accounting Standards Board.
"Our material scores are positively correlated to traditional scores, but they are meaningfully different," Bennett said. "We now have evidence that investing in companies with high material/low immaterial ESG scores is significantly better than those with high immaterial/high material scores."
The early results have already encouraged Russell Investments to incorporate the new material ESG scoring approach in its decarbonisation strategy, which serves as the foundation for low carbon investment funds available in several markets globally.
Bennett added that these results also align with expectations of industry bodies such as the Task Force on Climate-related Financial Disclosures and the United-Nations backed Principles for Responsible Investment that actively recommend companies focus more on the material ESG issues that directly affect their bottom line.
"I believe this new material ESG scoring approach represents a strong development in the industry’s understanding of ESG performance drivers," said Nicki Ashton, Head of Strategic Partnerships, Institutional Australia, at Russell Investments. "It further responds to client expectations for products that address their ESG-related concerns and deliver desired outcomes, such as our low carbon global shares fund."
About Russell Investments
Russell Investments, a global asset manager, offers multi-asset portfolios and services which include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors—using the firm’s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures—to help each achieve their desired investment outcomes. The firm has AUD $379.2 billion in assets under management (as of 12/31/2017).
Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as London, Paris, Amsterdam, Sydney, Tokyo, Shanghai, Toronto and New York. For more information about how Russell Investments helps to improve financial security for people, visit https://russellinvestments.com/au/
Issued by Russell Investment Management Ltd ABN 53 068 338 974, AFS Licence 247185 (“RIM”). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. This information has been compiled from sources considered to be reliable, but is not guaranteed. This document is not intended to be a complete statement or summary of the Russell Investments Low Carbon Global Shares Fund (Fund). Investing in the Fund has risks. You should consider these risks in light of your objectives, financial situation and needs. Any potential investor should consider the latest Product Disclosure Statement (PDS) for the Fund in deciding whether to acquire, or to continue to hold, an investment in any Russell Investments product. The PDS can be obtained by visiting www.russellinvestments.com.au or by phoning (02)9229 5111. All rights reserved.
Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.
First Used: February 2018.