Quick thoughts: Staying ahead of ESG risks and opportunities

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By Stephen H. Dover, CFA, Chief Market Strategist and Director of the Franklin Templeton Investment Institute; Mary Jane McQuillen, Portfolio Manager and Head of ESG, ClearBridge Investments; Michael Hasenstab, Ph.D., Chief Investment Officer, Templeton Global Macro; Robin Freeman, Director of ESG Education, ClearBridge Investments; Vivian Guo, Portfolio Manager and Co-Head of Global Macro ESG, Templeton Global Macro.

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

I was particularly fortunate to be able to moderate this female-dominated roundtable on the occasion of International Women’s Day, whose theme designated by the United Nations for 2022 is “Gender equality today for a future sustainable”. Here are some key insights from our conversation:

  • ESG alpha is a quantifiable result of improvements. We found that improvements in ESG ratings are correlated with higher economic growth for countries and earnings growth for companies. An ESG assessment process focused on an increasing rate of ESG adoption provides more insight and better returns than using standardized ratings or exclusions.
  • The energy transition is an important lever in terms of “E”. As the war in Ukraine shows, diversification of energy sources can improve global economic stability. As higher prices for carbon-based energy sources fuel inflation, acceleration towards renewables becomes more likely.
  • The impact of “S” is increasingly clearly defined. Tackling issues such as the gender pay gap, through better reporting and improved family-friendly policies, creates incentives for women to join or stay in the workforce and can result in an increase in the rate of participation in the labor market. The added diversity of a broader set of perspectives also enhances the depth of investment analysis.
  • Commitment can have a big impact on the “G”. The responsiveness of companies to the importance of ESG factors is reinforced when it is expressed by major shareholders. Active and engaged asset managers can encourage company management to improve ESG factors.
  • Millennials and women will control an increasing share of total assets. Over the next 20 years, America’s millennials will inherit some $68 trillion in wealth.1 Surveys indicate that 95% of this group is interested in sustainable investing. In addition, 70% of women generally change advisors after the death of a spouse.2

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

What are the risks ?

All investments involve risk, including possible loss of capital. 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. So, as bond prices adjust to a rise in interest rates, the stock price may fall. There are special risks associated with investing in foreign securities, including risks associated with political and economic developments, business practices, availability of information, limited markets and exchange rate fluctuations and policies.

Impact and/or environmental, social and governance (ESG) investment managers may consider factors beyond traditional financial information to select securities, which could result in relative investment performance s discarding other strategies or broad market benchmarks, depending on whether those sectors or investments are in favor or out of favor in the market. In addition, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also cause relative investment performance to deviate.

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1. Source: Cerulli Associates, “U.S. High Net Worth and Ultra High Net Worth Markets 2018: Demographic Shifts in Private Wealth.”

2. Sources: McKinsey & Company, 2020. Blair Duquesnay, “Women will inherit the power of the wallet”, Financial Advisor, April 11, 2019, fa-mag.com.

3. Sources: ClearBridge Investments, 2021 Impact Report. As of June 12, 2020. JP Morgan, Bloomberg /US S&P 500 Companies. Courtesy of JP Morgan Chase & Co., JP Morgan ESG Wire, ©2020 .

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

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.