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Materiality Matters

Targeting the ESG issues that impact performance—the Material ESG Score

Emily Steinbarth, Sr. Quantitative Research Analyst

In 2018, Russell Investments developed a new way to measure a company’s ESG (environmental, social and governance) score. Drawing on metrics developed by industry leaders Sustainalytics, MSCI, and SASB (Sustainability Accounting Standards Board), our Material ESG Score identifies and evaluates those issues that are financially important to a company. The material score can be used to differentiate between companies in a way that a traditional aggregated ESG score does not facilitate. It allows us to distinguish between companies who score highly on ESG issues that are financially material to their business, from those who score highly on issues that are not financially material to their business. Our evidence suggests that the Russell Investments Material ESG Scores are better predictors of return compared to traditional ESG scores

Bottom line: Not all ESG issues matter equally

 

The relevance of ESG issues varies industry to industry, company by company. For example, fuel efficiency has a bigger impact on the bottom line of an airline than it does for an investment bank. So, rather than adopt a one-size-fits-all approach, we worked to develop an ESG scoring system that is specific to a company and its profitability.

Bottom line: Not all ESG issues matter equally The relevance of ESG issues varies industry to industry, company by company. For example, fuel efficiency has a bigger impact on the bottom line of an airline than it does for an investment bank. So, rather than adopt a one-size-fits-all approach, we worked to develop an ESG scoring system that is specific to a company and its profitability.

Financial materiality is not the only reason to look at ESG information. Double materiality, or going beyond financial materiality to consider broader environmental and stakeholder materiality, is critically important. Rather than ignoring other issues, we think it’s time to move beyond ambiguous “ESG” labeling toward more explicit and transparent terminology. Our Material ESG Score is tailored to financial materiality – it’s explicit and transparent in that endeavor. To measure materiality in the other direction – how is a company impacting the world outside – we believe frameworks such as the European Union’s Principal Adverse Impact indicators offer a useful starting point. To generate our in-house Material ESG Score, we leveraged data from ESG data providers alongside the industry-level materiality map developed by SASB. Since our original research in 2018, the concept of materiality has become much more widely adopted across the industry. Here we summarise our original research as well as developments that have taken place in the years since we first released our score

Rather than adopt a one-size fits-all approach, we worked to develop an ESG scoring system that is specific to a company and its profitability.

Financial materiality is not the only reason to look at ESG information. Double materiality, or going beyond financial materiality to consider broader environmental and stakeholder materiality, is critically important. Rather than ignoring other issues, we think it’s time to move beyond ambiguous “ESG” labeling toward more explicit and transparent terminology. Our Material ESG Score is tailored to financial materiality – it’s explicit and transparent in that endeavor. To measure materiality in the other direction – how is a company impacting the world outside – we believe frameworks such as the European Union’s Principal Adverse Impact indicators offer a useful starting point. To generate our in-house Material ESG Score, we leveraged data from ESG data providers alongside the industry-level materiality map developed by SASB. Since our original research in 2018, the concept of materiality has become much more widely adopted across the industry. Here we summarise our original research as well as developments that have taken place in the years since we first released our score.

The LBMA is responsible for maintaining the standards and specifications for the 400 troy ounce bars produced by the refiners on their good delivery list.
Owners of ETFs such as GLD and IAU can enjoy the benefits of holding custodian vaulted bullion in the form of liquid securities.
Key takeaways regarding the gold futures market is that it is a very liquid, short-term exposure management tool and benefits from nearly 24- hour transparent price discovery with risk management benefits related to its highly regulated trading rules and centralised clearing process.

Conclusion

 

As mentioned, gold has long been viewed as a store of value. However, the ways for investors to efficiently own the world’s most widely held investment commodity continue to evolve over time. Some long-term institutional investors may prefer the security associated with owning fully funded physical gold bullion that is vaulted with a custodian bank. However, as this market has evolved, a similar risk profile associated with ownership of vaulted gold bullion may be accessed by investing in an ETF such as GLD or IAU that holds allocated gold bars at a depository custodian on their shareholders behalf. For an investor seeking more tailored unfunded exposure, OTC forwards or swaps can be utilised. Futures offer similar unfunded exposure characteristics and delivery potential, as well as the standardisation and risk management benefits of an exchange and centralised clearing.

1 Defined-risk strategies such as option structures are viable for investors with tactical objectives but are beyond the scope of this review.

2 The World Gold Council, The relevance of gold as a strategic asset, US edition, February 2020, p. 9. Illustration used with permission. Based on 2019 above ground estimates and the standard Olympic swimming pool dimensions of (length = 164ft, width = 82ft, depth = 9ft). Other includes “other fabrication” (12%) and “unaccounted for” (2%) Source: World Gold Council, Metals Focus, Refinitiv GFMS, US Geological Survey

3 The World Gold Council, Market Update – Gold supply chain shows resilience amid disruption. May 2020

Related references Luu, V. (2020, October 15). “Big shoes to fill: Rethinking defensive asset allocations after a 40-year bull market in Treasury bonds”. Russell Investments Blog. Available at: https://russellinvestments.com/us/blog/rethinking-defensive-asset-allocations SPDR® Gold Shares. State Street Global Advisors. Available at: https://www.ssga.com/us/en/institutional/etfs/funds/spdr-goldshares-gld iShares Gold Trust. Blackrock. Available at: https://www.ishares.com/us/products/239561/iau Bullion Market Overview. London Bullion Metals Association (LBMA). Available at: http://www.lbma.org.uk/market-overview COMEX Gold Futures. “Why Trade GC Futures?” CME Group Inc. Available at: https://www.cmegroup.com/trading/whyfutures/welcome-to-comex-gold-futures.html “News Release: CME Group to Launch New Gold Futures Contract with Expanded, Flexible Delivery in 100-ounce, 400-ounce or 1- kilo Bars” (2020, March 24) CME Group Inc. Available at: https://www.cmegroup.com/media-room/pressreleases/2020/3/24/cme_group_to_launchnewgoldfuturescontractwithexpandedflexibledel.html

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