Bolstered by research showing the majority of institutional investors are considering environmental, social and governance issues in their investments strategies, Russell Investments has created a new way to score companies on the particular factors that could have a material influence on finances and returns.
“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 of equity strategy and research at Russell Investments, in a press release. “We can now distinguish those companies which score highly on ESG issues that are financially material to their business and profitability.”
Read: Two-thirds of institutional investors use ESG analysis
The scoring method works off the idea that a one-size-all method won’t accurately highlight the most relevant environmental, social and governance issues affecting the financial performance of a particular company. For example, notes the release, it makes more sense to measure the fuel efficiency of an airline than an investment bank, as fuel efficiency is more likely to indicate a potential for outperformance.
The score is created by combining data from two environmental, social and governance analytics companies: Sustainalytics’ 145 sub-categories of environmental, social and governance issues and the 30 material factors identified by the Sustainability Accounting Standards Board.
Russell Investments found the material score correlates 65 per cent with traditional environmental, social and governance scores, suggesting they’re positively correlated, but different enough to make it a useful metric. “We now have evidence that investing in companies based on high material ESG factors is significantly better than those with greater immaterial factor,” said Bennett.