A New Methodology:
The new scores allow ESG investors to convert between companies in a more correct way. As reported by Emily Steinbarth, quantitative analyst at Russell, who co-authored the study, the firm produce the new scoring methodology with comprehensive ESG scores from data provider Sustainalytics, which “are used for a wide difference of reasons beyond investment selection, and the industry-level palpability map developed by the Sustainability Accounting Standards Board (SASB).”
The new scores were back-tested for a period between December 2012 and June 2017 using the Russell Global Large Cap Index. The research team found that a listed company’s material ESG score offers a promising signal for notifying investment decisions, producing slightly better performance than traditional ESG scores through the back-tested period.
Bennett added that the results of this study line up with the expectations of supportable investment industry research organizations, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the United Nations-backed Principle for Responsible Investment (PRI). These NGOs suggest that companies focus on the material ESG issues that directly attack their bottom line. An electric utility, for example, would make carbon emissions a material ESG factor in calculating the long-term impact on its ability to provide cleaner energy resources to business and residential customers.
Following the Money:
Led by women and millennials, who will control the majority of wealth in the U.S. within 15 years, sustainability-focused investors are demanding more chances to incorporate ESG metrics into portfolio analysis. In turn, financial advisors are wanting better information from asset managers about how they use ESG analysis to reduce risk and create a performance advantage.
As a materiality-focused talk to understanding ESG moves to center stage, large asset managers are calling for the alertness of which off-the-balance-sheet issues create risk and opportunity for firms. In a recent letter to the CEOs of companies owned in its portfolios, BlackRock CEO Larry Fink recently drew attention to “A New Model for Corporate Governance” which focused on long-term value creation for shareholders.
The research also confirms a founding premise for the work of the SASB since its inception, which is that markets don’t need more ESG data, they need better ESG data for investors to use in the portfolio securities selection process.