Highlights six case studies of changing country scores in Global Macro Views.
In February 2018, Templeton Global Macro (TGM) published Global Macro Shifts issue 9—Environmental, Social and Governance Factors in Global Macro Investing [GMS-9]. The paper explored how we evaluate environmental, social and governance (ESG) factors in our macroeconomic research process, and described the process of codifying the team’s research discussions into quantifiable scores. GMS-9 formally introduced our proprietary ESG scoring system, the Templeton Global Macro ESG Index (TGM-ESGI). Going forward, we intend to publicly update our scores on a recurring basis. This issue is the first of these updates. It contains a brief background on our ESG philosophy and our scoring process, along with updated TGM-ESGI scores for 56 countries. We also include brief case studies for three countries that have improving projected scores and three countries with deteriorating projected scores.
Before delving into the specific scores, we would like to summarize a few key points on how TGM views our internal ESG process. These points also reflect how TGM believes ESG can be best utilized by investors in the sovereign space.
The TGM-ESGI is a composite of 13 subcategories (see GMS-9, page 4) determined to be material to macroeconomic performance, scored from 0–100.1 The research team assigns numbers by overlaying their views on a benchmark created by global indexes for current scores. Analysts then provide projected numbers in anticipation of how conditions will change in the medium term. The final scores are calculated with weightings of 40% for governance, 40% for social and 20% for environment. The environment receives a lower weighting because its effects on macroeconomic performance take place over a significantly longer-term time horizon. The change in score, the metric TGM places the greatest emphasis on, is simply the projected score minus the current score.
The results from our February 2019 scoring are shown in Exhibits 1 and 2. We have expanded the number of countries to 56 from 44 previously.
Exhibit 1: TGM-ESGI Scores: Current (As of February 2019)
Exhibit 2: TGM-ESGI Scores: Projected Change (As of February 2019)
Source: Calculations by Franklin Templeton Capital Market Insights Group using data sourced from Bloomberg, Central Bank News.
As stated earlier, what TGM pays greatest attention to are the “tails,” countries in which there is a drastic change with regards to projected ESG scores in either direction. We have highlighted six of these countries, three showing projected improvement and three showing expected deterioration.
Source: TGM-ESGI. Our medium-term projections are for the next three years.
Source: TGM-ESGI. Our medium-term projections are for the next three years.
Source: TGM-ESGI. Our medium-term projections are for the next three years.
Source: TGM-ESGI. Our medium-term projections are for the next three years.
Source: TGM-ESGI. Our medium-term projections are for the next three years.
Source: TGM-ESGI. Our medium-term projections are for the next three years.
Global Macro Views is a complementary publication that will update and/or amplify the periodic research-based briefing on global economies called Global Macro Shifts. Both feature the analysis and views of Dr. Michael Hasenstab and senior members of Templeton Global Macro. This economic team, trained in some of the leading universities in the world, integrates global macroeconomic analysis with in-depth country research to help identify long-term imbalances that translate to investment opportunities.
This material reflects the analysis and opinions of the authors as at 15 February 2019 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 emerging 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.