Thinking Holistically About ESG

by Serena Perin Vinton, CFA, Franklin Templeton Investments

In this excerpt from our latest “Global Investment Outlook,” Franklin Equity Group Portfolio Manager Serena Perin Vinton discusses how her team thinks about environmental, social and governance (ESG) investing and the opportunities in investment-driven innovations levered to a more sustainable environment.   

In our view, managers need to be thinking holistically about ESG in today’s environment. The effects of climate change are significant and we see them in the news near daily, with ever-growing wildfires in Western North America, hurricanes that retain their intensity long after landfall, and the shrinking Arctic Circle, just to name a few. As governments around the world seek to pass legislation and regulatory change to limit greenhouse gas emissions, their actions have implications across industries. At the same time, a growing number of clients want to know their capital investments are supporting their values and change they want to see in the world. As managers, we understand that integrating ESG considerations into our investment process is an important aspect of identifying investment opportunities and reflecting what many clients expect of us.

Investment-Driven Innovations Driving Opportunities

We see opportunities across many different industries when it comes to investment-driven innovations. Synthetic biology, green hydrogen, water-saving technologies and renewable energy are just a few examples with long-term growth prospects levered to a more sustainable environment. Green energy has been one area of focus. As we see a shift away from carbon heavy energy to more renewables, significant change is occurring in the transportation industry. One area we’ve focused on is the electric vehicle (EV) space, not just for individual use, but at a larger scale in applications like municipal buses, transit and shuttle operations.

The development of these vehicles also contributes to growth in new infrastructure, as solar and alternative energy sources can be harnessed for use in vehicle charging stations, for example. We are excited about the innovations taking place. Speaking from an equity perspective, we see capital gravitating toward those companies demonstrating commitment to ESG initiatives across multiple fronts. These initiatives can include investing in human capital via talent and diversity programs, focusing on reducing carbon emissions from core businesses, and consideration of voting rights and board composition. Conversely, companies which aren’t addressing these concerns may see a reduction in interest from the investing community.

As active managers, we can play a role by engaging with company management teams regarding ESG metrics. In our view, compelling investment opportunities can be uncovered by identifying companies which are seeking to improve their ESG profiles, creating a virtuous cycle to draw capital from a wider investor base.

Allocating Capital Towards Solutions

In the short term, the market implications of climate change events may be focused more locally; for example, supply chain disruptions related to hurricane damage or businesses considering where to place their operations based on the likelihood of severe weather events. However, as we see events grow in number, size, or severity, there could very well be a multiplier effect which contributes to market volatility as investors grapple with the increased uncertainty of weather-related events. In the intermediate to longer term, we believe there are market implications driven by the allocation of investor capital towards companies which seek to address the issues at hand and in turn allocate their capital towards investments that provide solutions through new innovative products or cleaner, more efficient manufacturing, for example.

 

 

 

 

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favour in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating. Investments in fast-growing industries, including the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasising scientific or technological advancement or regulatory approval for new drugs and medical instruments. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies.

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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This post was first published at the official blog of Franklin Templeton Investments.

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