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Franklin Templeton Thoughts: Thinking Holistically About ESG

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.

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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.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

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. 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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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. Past performance is not an indicator or a guarantee of future results. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results. Diversification does not guarantee profit or protect against risk of loss.

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This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

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