The Importance of Tracking ESG Improvement in Countries

The change is more important than the level of the score.

    Michael Hasenstab, Ph.D.

    Michael Hasenstab, Ph.D.Portfolio Manager,Chief Investment Officer,Templeton Global Macro

    Dr Micheal Hasenstab, CIO Templeton Global Macro, presents a proprietary ESG index and forward looking projection on ESG scores. Most of the industry takes a level approach, Templeton Global Macro team takes a different approach where it's not the level that matters but also the change of a score.

    Michael Hasenstab: ESG [Environmental, social and governance] is a critical part of any investing in sovereign—particularly in emerging markets. So, our team has developed a proprietary ESG index1 as well as a forward-looking projection on ESG scores.2 Most of the industry takes a level approach, which means, typically, poor countries score bad and are excluded from investment, which means you're basically condemning lower income countries to always be lower income. Our view is that it's not the level that matters as much. It's important—one part of it—but not the only factor. The factor that is more important in generating financial returns, and also enhancing social welfare in the change. So, if a country is low income, and has a low level of ESG, but are implementing good policies to improve that, then social welfare will be enhanced as will financial returns. So that's the different approach we've taken to ESG.

    ENDNOTES

    1. The Templeton Global Macro ESG Index (TGM-ESGI) is a proprietary scoring mechanism that allows us to quantify ESG inputs and enables comparison across a broad spectrum of countries.
    2. Our medium-term projections are for the next three years.