Environmental, social and governance (ESG) factors are being recognised in global fixed income investing as value-added indicators of potential economic performance. Templeton Global Macro CIO Michael Hasenstab examines ESG factors in investing and how they speak to an economy’s potential as an investment destination.
Franklin Templeton has always considered that good financial returns in fixed income come from conditions where the investment manager is investing ‘alongside’ a country.
“[That’s] a win win, where the countries’ social welfare is improving and financial investments will do better in that environment than in the converse,” Hasenstab says.
And with the growing recognition of the importance of ESG factors in better investment outcomes, Franklin Templeton wanted to codify and formalise this process.
Research analyst Vivian Guo has taken the lead on ESG investing within the global macro group, and has developed measures that help the team understand, not just current ESG outcomes, but also future projections.
Franklin Templeton’s global macro team identified 13 subcategories across the governance, social and environment areas. After identifying these subcategories, the group went about scoring them using a combination of globally recognised indices and the team’s propriety research.
The global indices were helpful in developing a baseline score and the propriety research assisted in building a projected score of where these countries are expected to head in terms of ESG outcomes.
“Adding the projected score, we are able to look at the change between the current and the projected and we think that number is more illustrative of the direction that these economics are headed in,” Guo said.