- Our analysts review and integrate ESG data as part of their fundamental research and collaborate with ESG analysts to dig deeper.
- Along with external data sources, analysts use proprietary models and screens as required, and state-of-the-art technology to calculate an ESG “score” for each company and to identify champions and laggards.
- We tailor our assessment of risk by fixed income sector.
Sustainable investing is the future of our industry. We need to look ahead to understand the real-world impacts of our investment decisions.
David Zahn, CFA, FRM
Head of European Fixed Income, Portfolio Manager
Our Approach to ESG
We believe that ESG risks are evolving rapidly and have structured our approach around this.
ESG investing within Franklin Templeton Fixed Income is rooted in risk-management with an emphasis on climate change risk. Assessing material ESG factors allows us to build a more holistic view of the multiple sources of risk that may impact the value of our investments.
Three Pillars Unite Our Risk-Based Approach to ESG
Integration
Engagement (Two Tiers)
- Analysts engage with companies at an individual level in order to collect information that will allow us to understand how they are positioned to deal with risks and at a thematic portfolio level (aligned to specific environmental or social trends, sectors or industries).
- When a company is lagging, we engage to understand or give them an opportunity to improve prior to divestment, acknowledging that frequently available data can be old and no longer accurate.
A Focus on Climate Change
- We believe climate change risk is the most material ESG-related risk and opportunity for investors.
- We have a specific engagement program in order to gather data that covers climate change governance, risk and opportunity management, and reporting.
Proprietary Sector Level Methodology
Our methodology for assessing risk varies slightly between sectors. Our fixed income analysts collaborate with dedicated ESG specialists when researching companies and utilize proprietary methodology tailored to each fixed income sector. However, the underlying premise is the same: we must be compensated for all risks that we take.
Credit
Our credit research analysts are sector experts. They combine bottom-up fundamental credit analysis with a review of any material ESG factors to arrive at a holistic assessment of credit strengths and weaknesses and potential risks.
Sovereign
Analysts use a model that assesses 65 data points per country per year, assigning different weights to ESG categories according to their relative materiality to sovereign creditworthiness.
Floating-Rate Loans
The team uses a 20-factor model with an emphasis on policy and improving resource efficiency, each analyst still has the discretion to make small adjustments within each industry.
Emerging Markets
Analysts consider the materiality of all ESG issues, however for emerging markets, the governance is very often a critical consideration when it comes to deciding whether to take exposure to a company.
A Closer Look at Engagement and Water Risk
Our ESG and fixed income analysts engage with companies to collect information that will allow them to understand how the companies we invest in are positioned to deal with an increasingly water scarce environment, and the pressure that this may place on operations.
ESG Specialists
Franklin Templeton Fixed Income's focus on ESG starts with our dedicated ESG specialists embedded within the investment team and is fully integrated across our entire team of investment professionals, diversifying the experience necessary to create a holistic understanding of ESG issues material to a company's financial performance.
David Zahn, CFA, FRM
Head of European Fixed Income, Portfolio Manager, Co-chair, Franklin Templeton, Stewardship and Sustainability Council
Kasper Hanus, Ph.D.
Senior Sustainability Manager, Sustainability & Europe Fixed Income