Why ESG analysis is critical: fund manager

ESG factors are quickly becoming a pillar of macroeconomic analysis.

Michael Hasenstab, CIO of Templeton Global Macro, says in a February report on fixed income investing that such factors must be part of “any macroeconomic analysis and investment strategy focused on long-term, fundamentals-driven performance.”

To assess ESG conditions in different countries, he and his team have developed a proprietary scoring system called the Templeton Global Macro ESG Index.

Read: Why and how to address clients’ ESG values

Economists and historians have long recognized and debated the importance of environmental factors and of social and political institutions for the long-term economic development of countries, he says. He refers to theories from as far back as the 16th century, where great importance was assigned to the role of the environment in “the success of agriculture, the prevalence of diseases, and other determinants of economic growth.”

Fast forward to today, and assessing ESG factors has become important when looking at an “economy’s potential as an investment destination and the sustainability of that investment,” says Hasenstab.

Read: Why ESG investing provides competitive advantage

When choosing investments, he and his team consider the following.

The quality of governance, and of political and economic institutions. “Robust governance […] typically goes hand in hand with stronger potential growth, as well as greater resilience in the face of domestic or external challenges,” says Hasenstab.

Social conditions. These can impact a country’s stability and policy mix, “while also directly impacting a country’s macroeconomic developments through competitiveness and efficiency.”

Environmental factors in emerging and frontier markets. These regions typically “have looser regulation and more limited ability and resources to react” to events such as natural disasters, says Hasenstab. Along with dealing with human tragedy, the countries may struggle with consequential “disruptions in energy, food and material availability that cause issues like skyrocketing inflation or supply chain disruptions.”

Read his full report for more on the Templeton Global Macro ESG Index.

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