Home Analysis Rising ESG Scores Signal Growth Opportunities

Rising ESG Scores Signal Growth Opportunities

Stockholm (NordSIP) – Templeton Global Macro (TGM), one of the investment teams of Franklin Templeton Investments, published its latest Global Macro Shifts report. The publication outlines how TGM integrates ESG factors into its research process to assess current and projected ESG conditions in various countries, and compare macroeconomic performances around the world.

“In our view, any macroeconomic analysis and investment strategy focused on long-term, fundamentals-driven performance should incorporate ESG factors as a key pillar of its analysis,” says Michael Hasenstab, CIO at TGM.

TGM integrates ESG considerations into its analysis through a proprietary ESG scoring system – the Templeton Global Macro ESG Index (TGM-ESGI). The Index covers 56 countries and is built in two steps. First, a composite index is created from 13 ESG factors – scored 0 to 100 – determined to be relevant to macroeconomic performance. TGM calculates these scores with data from credible sources like the World Bank and the United Nations. The projected change in these ESG factors is then estimated based on the upcoming changes to these factors, as expected by TGM’s analysts. The analysts derive these forecasts from their expertise and research about how conditions are likely to evolve in the next three years.

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The final scores give a weigh of 40% for governance, 40% for social and 20% for the environment. According to TGM, the latter is weighted the least because its effects take longest to impact macroeconomic variables.

According to the report, TGM-ESGI focuses on “forward-looking data points. Rather than current ESG performance, which is strongly correlated with income levels, TGM believes that momentum, or change in score, is the measure that truly matters for both potential investment performance and for determining where capital could be deployed for the greatest positive impact.” For this reason, the report argues the tool is best suited to long term investors who have the “patience to see that view come to fruition”.

The 2019 report, published in February, ranks Denmark, Canada, Switzerland, Singapore and Sweden as the top 5 global ESG performers. At the opposite end, it ranks Venezuela, Nigeria, Tanzania, Ecuador and Kenya as the worst laggards. Most importantly, it singles-out Argentina, Brazil, India, Serbia and Indonesia as the countries where it expects the most improvements to the TGI-ESGI scores.

The projected growth in the scores of Argentina, Brazil and Indonesia are primarily the result of expected improvements in governance. TGM’s analysts expect President Macri of Argentina to be re-elected in October, which will allow the country to remain committed “to politically challenging but necessary reforms in order to rebalance its economy. Decisions to float the exchange rate, enact pension reform and reduce subsidies have caused short-term economic pain but are critical to the country’s long-term potential.”

“We are cautious of potential deterioration in certain ESG factors due to the current administration’s inclinations, paying particular attention to institutional strength, social cohesion and unsustainable practices,” the report argues regarding Brazil’s new president, Jair Bolsonaro. However, the analysts say that the administration’s capable economic team, pro-market policies, as well as a fall in corruption and red-tape are likely to improve business conditions.

As in the case of Argentina, TGM’s analysts also expect the re-election of President Joko Widodo to increase Indonesia’s ESG scores. “We expect further progress on president Widodo’s reform agenda following elections. This includes building infrastructure, reducing regulations on businesses and fighting corruption. There will also likely be an emphasis on reducing poverty and inequality,” the report argues. Orthodox fiscal policy supported by the central bank is also expected to aid the country’s long term growth prospects. However, TGM is keen to highlight that “social cohesion in Indonesia is expected to deteriorate with the rise of fundamentalist Islamic groups and their greater influence over politics.”.

The report concludes with a discussion of the fall in the scores for Italy, Turkey and South Africa, where deteriorating governance scores are seen to erode overall economic prospects.


Click here to access the original report.

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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