Be wary of ESG data, Templeton says

Asset Class in Focus

ESG disclosures from companies and data providers are backward-looking, argues Maarten Bloemen, Toronto-based portfolio manager and research analyst for global equities at Franklin Templeton Investments.

Maarten Bloemen, Franklin Templeton Investments

“When you are looking at [company] disclosures for ESG, it is a bit lacking,” he told FSA during a recent visit in Hong Kong.

The same goes for ESG data providers such as MSCI ESG and Sustainalytics: “Without any disrespect to them, they do use the best information but sometimes it’s a year in the past.”

Taking Denmark-based power company Orsted as an example, Bloemen said that reports show that they still have high carbon emissions.

However, last November management sold the oil and gas businesses and they are in the process of selling the thermal coal business. Despite what the reports say, the firm has transformed its model to become a clean energy provider in Europe, Bloemen said.

Orsted is one of the largest holdings of the Templeton Global Climate Change Fund, which Bloemen co-manages.

“You can see high emissions [from Orsted] because that is last year’s data when they still had oil and gas. It is not today’s data but it is still reported.”

Bloemen said that investors looking at ESG disclosures should always check if companies have set future emission reduction targets and assess whether they are obtainable, for example, whether the targets are grounded in science.

Fund repositioning

The Templeton Global Climate Change Fund is a global equity fund which was previously the Global (Euro) Fund before it repositioned the strategy in March to take advantage of companies that are preparing for the transition to a lower carbon economy.

After the fund was repositioned, the number of holdings was reduced to around 50 names from nearly 100, according to Bloemen, who added that the original value investing philosophy has not changed.

The themes that the manager looks at are climate change solutions, such as companies providing renewable energy, clean technology and carbon reduction solutions; companies that are taking concrete steps to reduce carbon emissions; and companies that already have a low carbon footprint or little exposure to carbon-intensive sectors, such as bio-pharmaceutical and technology companies, according to Bloemen.

The fund does not invest in companies that have fossil fuel as their main business, even if they have taken steps to lower carbon emissions. “They may be making a big effort to reduce carbon emissions, but 90% of their capital expenditure is still towards developing oil and gas,” he said.

Relative underperformance 

Bloemen acknowledged that the fund has underperformed its benchmark index, the MSCI AC World Index (see below).

He believes his fund’s focus on value stocks, which have been underperforming for several years, is the reason.

“We are a value shop, whether you call this a climate analysis fund or a global equity fund. And value in the last 10 years has not done very well.”

Taking US equities as an example, Bloemen said that it is underweight the asset class. US equities only account for 18% of the fund’s portfolio versus the 55% of the benchmark.

“The US market has been the best-performing market in the world, but we find the valuations stretched. We find Europe far cheaper and hence we are significantly underweight the US.

“The decade has been poor for us, but I think we re in an inflection where value [investing] is becoming interesting.”

 


The Templeton Global Climate Change Fund versus its benchmark index

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