Any macroeconomic analysis and investment strategy focused on long-term, fundamentals driven performance should incorporate ESG factors as a key pillar of its analysis.
The importance of incorporating ESG factors in long-term investment strategies
In this edition of Global Macro Shifts, Franklin Templeton Investment’s research-based briefing on global economies, the Templeton Global Macro team, led by Dr. Michael Hasenstab, reviews the importance of ESG factors in macroeconomic analysis and the sovereign asset class, highlighting several case studies to illustrate the team’s thoughts on ESG.
The team uses Japan, post the 2011 Tohoku earthquake, to illustrate the potential impact of environmental factors.
The earthquake and tsunami combination also resulted in a meltdown at the Fukushima Daiichi nuclear plant, causing what has now come to be known as Japan’s Triple Disaster.
Not only were thousands of lives lost but the disaster also caused a massive economic impact.
The paper explains that the four prefectures most heavily affected by the earthquake accounted for about 6.2% of Japan’s GDP. Rolling blackouts, as a result of electricity production shortages, impacted other areas.
One major consequence, and likely the most long-lasting, has been to Japan’s energy consumption. Japan had been building its nuclear capability for decades and by 2010 it accounted for about a quarter of total electricity generation.
“The meltdown at Fukushima and the resulting radioactivity risks changed the public’s opinion of nuclear power, and all such plants were shut down in the aftermath. The result was a significant increase in fuel imports to plug the hole that nuclear power had previously filled; fossil fuels’ share of electricity generation increased by 23% while nuclear energy dropped to 2% by 2012. A weak yen and record-high commodity prices during this time caused the fuel deficit to balloon and dragged down Japan’s current account surplus by more than 1% of GDP,” the paper explains.
But because of Japan’s high social and governance scores (see Exhibit 34, left), due to its solid institutions and social cohesion, the impact on the economy was not as great as some had feared.
“Japan therefore serves as a reminder of both the potential impact of environmental factors and the resilience that strong social and governance institutions afford to a country,” the team concludes.