Upgraded “materiality matters” methodology rejects one-size-fits-all approach
SEATTLE, April 13, 2020 — Russell Investments’ research analysts have upgraded their ESG (environmental, social & governance) scoring approach to more accurately identify ESG factors that could impact the financial performance of publicly-traded companies. The enhanced methodology includes the addition of a corporate governance score for all companies, use of open-sourced environmental data from multiple providers and more emphasis on forward-looking information where available.
“We believe exploring the ESG characteristics of a portfolio with a focus on materiality—the relevance and significance of ESG issues—is one of the best ways to increase both transparency and impact for investors,” said Emily Steinbarth, senior quantitative research analyst at Russell Investments. “ESG investing is still in relatively early days, especially when it comes to the data-driven accountability that is required to gain an accurate picture of ESG performance, and we’re advancing toward that goal.”
For the corporate governance metric, the upgraded methodology uses a comprehensive governance assessment from data-provider Sustainalytics. The new metric more closely aligns to the firm’s proxy voting practices including an assessment of board and management quality and integrity, board structure (including independence and diversity), ownership and shareholder rights, remuneration, audit and financial reporting as well as stakeholder governance.
“We found our original materiality score lacked some of the corporate governance information that truly matters, and our solution was to supplement the SASB framework with an additional pillar of corporate governance for all companies,” said Steinbarth. “Our greater focus on measuring corporate governance boosted the score of companies with strong management and lowered the score of several companies with weak corporate governance.”
Regarding the use of open-sourced environmental data, Steinbarth said one of the fundamental shortfalls with ESG data is quality. Moving to a model where raw data can be used from a variety of providers allows the firm’s research team to capture unfiltered data, with a quicker time from disclosure to incorporation in the score. “More data is now available on what the industry is coming to see as increasingly relevant topics: data privacy and security, competitive behavior, and systemic risk management,” Steinbarth said.
In terms of more emphasis on forward-looking adjustments, Steinbarth said a major criticism with ESG data is the focus on backward-looking information. The upgraded methodology considers three pillars where forward-looking information is most relevant and available: GHG emissions, water management, and business model resilience. “Such details help build a picture not just of where the company has been in the past, but the direction it is heading for the future” Steinbarth said.
Overall, Russell Investments’ ESG material-matters model considers every company in the portfolio and allows the investor to simultaneously pursue other financial objectives. “While there can still be names in the portfolio that to the casual observer don’t scream ESG, such as a large technology stock, the key is understanding whether those companies are held because they were doing well on ESG issues that matter or just because they happen to have lower emissions than say, an oil and gas company,” Steinbarth said. “We believe the latter doesn’t tell you much about whether the tech company is actually sustainable.”
More information on Russell Investments ‘materiality matters’ ESG-research approach is available here.
About Russell Investments
Russell Investments is a leading global investment firm providing tailored solutions and services to institutions and individuals through financial intermediaries. Russell Investments is dedicated to improving people’s financial security, leveraging an 83-year client-centric heritage rooted in investment innovation. The firm is the fourth-largest adviser in the world with $307.4 billion in assets under management (as of 12/31/2019) and $2.4 trillion in assets under advisement (as of 6/30/2019) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments operates through 21 additional offices in major financial centers such as New York, London, Tokyo and Shanghai.
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