Quick Thoughts: Staying Ahead of Environmental, Social and Governance (ESG) Risks and Opportunities

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

I was particularly fortunate to be able to host this majority-female roundtable on International Women’s Day, for which the UN-designated theme for 2022 is “gender equality today for a sustainable tomorrow.” Here are some key insights from our conversation:

  • ESG alpha is a quantifiable result of improvements. We have found that improvements in ESG ratings correlate with higher economic growth for countries and earnings growth for companies. An ESG evaluation process focused on an increasing rate of ESG adoption provides more insight and better returns than using standardized ratings or exclusions.
  • Energy transition is a significant driver in terms of “E.” As the war in Ukraine highlights, diversifying energy sources can improve global economic stability. As higher prices for carbon-based energy sources fuel inflation, acceleration toward renewable energy becomes more likely.
  • The impact of “S” is becoming more clearly defined. Addressing issues like the gender pay gap, through better reporting and improving family-friendly policies, provides incentives for women to join or remain in the workforce and can cause a rise in the labor participation rate. The added diversity of a broader set of perspectives also improves the depth of investment analysis.
  • Engagement can have a large impact on the “G.” Companies’ responsiveness to the importance of ESG factors is enhanced when expressed by large shareholders. Active, engaged asset managers can encourage company management to improve ESG factors.
  • Millennials and women will control an increasing portion of total assets. Over the next 20 years, US Millennials will inherit some $68 trillion of wealth.1 Surveys indicate that 95% of this group is interested in sustainable investing. In addition, 70% of women typically change advisors after the death of a spouse.2