Russell Investments has created research findings in environmental, social & governance (ESG) investing with a material ESG score, which more accurately identifies ESG factors that could impact the financial performance of publicly-traded companies. The paper, titled “Materiality Matters: Targeting ESG issues that impact performance,” presents research that 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,” says 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 says. “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 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 says. “We now have research which indicates that investing in companies based on high material ESG factors is significantly better than those with greater immaterial factor.”
The team back-tested the new scores between December 2012 and June 2017, using the Russell Global Large Cap Index, and found that a firm’s material ESG score offers a promising signal for informing investment decisions.
The early results also have encouraged Russell Investments to incorporate the new material ESG scoring approach into its current decarbonization strategy, which serves as the foundation for low carbon investment funds available in several markets globally.
Merrill Lynch Brand Designs ESG Portfolios
Merrill Lynch and Merrill Edge have launched five new portfolios incorporating environmental, social and governance (ESG) factors in response to growing demand for investments with the potential to produce positive societal outcomes without sacrificing financial returns.
Designed by the Global Wealth and Investment Management (GWIM) Chief Investment Office (CIO), the new CIO Core Impact Portfolios incorporate the CIO’s disciplined investment process, portfolio construction views, portfolio management and oversight routines.
They consist primarily of exchange-traded funds (ETFs), require a minimum investment of $5,000 and range from conservative to aggressive. These offerings expand upon an existing array of impact offerings on both the Merrill Lynch and Merrill Edge platforms.
“The demand for ESG-integrated investment options has increased, as more investors are seeking a ‘double bottom-line’ approach to investing and a way to add an environmental or societal impact objective to a financial return,” says Chris Hyzy, chief investment officer for GWIM.
“These new portfolios are part of the ongoing expansion of our investment offerings and build upon a broad platform of both solutions and thought leadership in the impact arena,” adds Keith Banks, vice chairman of GWIM and head of the CIO and the Investment Solutions Group for Merrill Lynch and U.S. Trust.
EDHEC-Risk Institute Examines Retirement Products and TDFs
In a new publication entitled “Applying Goal-Based Investing Principles to the Retirement Problem”, EDHEC-Risk Institute and Professor John Mulvey of the Operations Research & Financial Engineering Department at Princeton University outline the shortcomings of existing retirement products, and lay the academic foundations for a new generation of risk-controlled target-date funds (TDFs).
The research efforts towards the design of more meaningful retirement solutions, with the support of Bank of America’s Merrill Lynch Global Wealth Management group, have led to the design of the EDHEC-Princeton Retirement Goal-Based Investing Index Series.
Commenting on the research publication, John Mulvey, professor of Operations Research and Financial Engineering in the ORFE Department at Princeton University, says “Applying Goal-Based Investing Principles to the Retirement Problem discusses important issues with developing the index series and its practical usage. Many developed countries are moving to a society with greater personal responsibility for financial decisions. This trend is evident with the shift from defined benefit (DB) to defined contribution (DC) plans. Unfortunately, most people do not have the tools nor the training to help themselves with the critical decisions about asset allocation, about savings, and about spending during retirement. The EDHEC-Princeton index series is aimed at informing the decision process. It provides superior information to the popular target-date funds, which do not distinguish among investors within an age category.”
Offering a perspective on the applicability of these indices, Anil Suri, managing director and head of Portfolio Analytics and The Innovation Development Center in the Chief Investment Office of Bank of America’s Global Wealth and Investment Management group, says “the EDHEC-Princeton Goal-Based Investing Index Series are an important innovation that can help individuals, and the institutions they rely on, to achieve critical retirement goals in a more efficient and effective fashion. Importantly, by using a very strong analytical foundation and demonstrating the practical feasibility of such an approach, the EDHEC-Princeton Retirement Goal-Based index series can help in the design and management of the next generation of retirement investment solutions that use liquid asset classes to generate income in retirement, while managing the effect of uncertainty on this very broadly applicable goal.”
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