An Update On Our ESG Scores

Can the impact of COVID-19 be lessened by weak health and economic measures? Templeton Global Macro Views highlights six country case studies.

Templeton Global Macro®

In this issue

In February 2018, Templeton Global Macro (TGM) released its original paper on the topic of environ-mental, social and governance (ESG) factors in sovereign fixed income investing. The paper (Global Macro Shifts—issue 9 [GMS-9]) explored the team’s novel approach to ESG investing, which does not merely measure current ESG levels as a screen, but instead focuses on projected changes in ESG scores that can reveal opportunities for investment as well as risks to avoid. TGM had been conducting similar research on the effects of governance and social factors on macroeconomic conditions for decades. However, the 2018 paper was the first time those insights were publicly codified into an ESG scoring system.

Since the publication of GMS-9 in early 2018, TGM has released updates of its ESG research and scores every six months. These recurring updates specifically contain current scores by country, as well as projected scores and a set of brief case studies. A recap of TGM’s philosophy and scoring process is also included, along with a review of any refinements in our methodology. In this October 2020 publication, we specifically provide updated ESG scores for 57 countries, along with brief case studies for Indonesia, Brazil, Nigeria, Venezuela, Hungary and Poland. The update also includes a section on the impact of COVID-19 on ESG scores, as well as look-back assessments of the accuracy of our ESG projections from previous years. Finally, we also take a look at how directional trends in ESG have aligned with actual investment performance over the years.

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WHAT ARE THE RISKS?

This material reflects the analysis and opinions of the authors as at 30 October 2020 and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton Investments. It is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed and the comments, opinions and analyses are rendered as at the publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market, industry or strategy. All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with merging markets are magnified in frontier markets. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.