Beyond Bulls & Bears


Quick Thoughts: Staying Ahead of Environmental, Social and Governance (ESG) Risks and Opportunities

Head of the Franklin Templeton Investment Institute, Stephen Dover, recently hosted a sustainable investing roundtable.

I recently hosted a sustainable investing roundtable with Templeton Global Macro’s Chief Investment Officer Dr. Michael Hasenstab and Vivian Guo, Portfolio Manager and co-Head of Global Macro ESG, as well as ClearBridge Investments’ Mary Jane McQuillen, Portfolio Manager and Head of ESG, and Robin Freeman, Director of ESG Education.

I was particularly fortunate to be able to host this majority-female roundtable on International Women’s Day, for which the UN-designated theme for 2022 is “gender equality today for a sustainable tomorrow”. Here are some key insights from our conversation:

  • ESG alpha is a quantifiable result of improvements. We have found that improvements in ESG ratings correlate with higher economic growth for countries and earnings growth for companies. An ESG evaluation process focused on an increasing rate of ESG adoption provides more insight and better returns than using standardised ratings or exclusions.
  • Energy transition is a significant driver in terms of “E”. As the war in Ukraine highlights, diversifying energy sources can improve global economic stability. As higher prices for carbon-based energy sources fuel inflation, acceleration towards renewable energy becomes more likely.
  • The impact of “S” is becoming more clearly defined. Addressing issues like the gender pay gap, through better reporting and improving family-friendly policies, provides incentives for women to join or remain in the workforce and can cause a rise in the labour participation rate. The added diversity of a broader set of perspectives also improves the depth of investment analysis.
  • Engagement can have a large impact on the “G”. Companies’ responsiveness to the importance of ESG factors is enhanced when expressed by large shareholders. Active, engaged asset managers can encourage company management to improve ESG factors.
  • Millennials and women will control an increasing portion of total assets. Over the next 20 years, US Millennials will inherit some US$68 trillion of wealth.1 Surveys indicate that 95% of this group is interested in sustainable investing. In addition, 70% of women typically change advisors after the death of a spouse.2

Currently only 4.4% of S&P 500 companies provide transparency on diversity,3 and 93% of US companies do not disclose gender pay gaps.4 This is a reminder that there is still a long way to go in the measurement of ESG factors, and there is room for continued growth.

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. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. 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.

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.

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1. Source: Cerulli Associates, “US High-Net-Worth and Ultra-High-Net-Worth Markets 2018: Shifting Demographics of Private Wealth”.

2. Sources: McKinsey & Company, 2020. Blair Duquesnay, “Women shall inherit the power of the purse,” Financial Advisor, 11 April 2019,

3. Sources: ClearBridge Investments, 2021 Impact Report. As at 12 June 2020. J.P. Morgan, Bloomberg /US S&P 500 firms. Courtesy J.P. Morgan Chase & Co., J.P. Morgan’s ESG Wire, ©2020.

4. Source: Just Capital: Gender Pay Equity Analysis 2019, as at December 2018.

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