Toronto-based Russell Investments Canada Ltd. has developed a new methodology that factors in the materiality of environmental, social and governance (ESG) factors in an effort for the firm to enhance its approach to socially responsible investing.

The new ESG scoring methodology “more accurately identifies ESG factors that could impact the financial performance of publicly-traded companies,” says Russell Investments in a news release.

In fact, the asset-management firm released a paper on Tuesday that argues that these new ESG scores “are better predictors” of stock returns than traditional ESG scores.

Russell Investments’ research has found that traditional ESG scores cover issues that are not material to a particular sector, or company.

“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,” says Scott Bennett, director, equity strategy and research, at Russell Investments and one of the paper’s authors, in a statement.

The new methodology utilizes ESG scores from Sustainalytics and a “materiality map” developed by the Sustainability Accounting Standards Board to create the new metric.

“Our new material metric allows ESG investors to differentiate between companies in a more precise way than a traditional ESG score,” Bennett says. “We can now distinguish those companies that score highly on ESG issues that are financially material to their business and profitability.”

Russell Investments is incorporating the new ESG scoring approach into its decarbonization strategy, which serves as the foundation for its low-carbon investment funds.

“This new material ESG scoring approach represents a strong development in the industry’s understanding of ESG performance drivers, and I’m looking forward to helping our clients benefit from it,” says Andrew Kitchen, managing director, institutional Canada, with Russell Investments, in a statement. “This industry-leading research further responds to client expectations for products that address their ESG-related concerns and deliver desired outcomes, such as our actively managed multi-manager ESG global equity fund.