Russell Investments has developed a new 'material' ESG methodology that it argues is a more accurate predictor of share price movements.
Using Environmental, Social, and Governance (ESG) scores from data provider Sustainalytics, Russell Investments has developed a more material measure of ESG that it says is a stronger predictor of market returns.
The new ESG methodology is based on the idea that, for example, fuel efficiency has a larger impact on the bottom line of an airline than an investment bank.
"Our new material metric allows ESG investors to differentiate between companies in a more precise way than a traditional ESG score," said Scot Bennett, who heads equity strategy and research at Russell Investments.
"We can now distinguish those companies which score highly on ESG issues that are financially material to their business and profitability," Mr Bennett said.
Russell Investments found that less than 25 per cent of the data items in a traditional ESG score are material for two-thirds of large-cap stocks.
"Our material scores are positively correlated to traditional scores, but they are meaningfully different," Mr 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," he said.
The focus on materiality is in line with the expectations of industry bodies such as the Task Force on Climate-related Financial Disclosures and the UN-backed Principles for Responsible Investment, said Russell Investments.