The long road toward ESG integration

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Julie Moret, Franklin Templeton

One of the latest fund management firms to sign on to PRI is Eastspring Investments, which is currently in the process of implementing an ESG focus across all asset classes, research and investment decision-making.

However, integrating ESG factors in the investment process will depend on individual investment teams and will take some time, according to various fund managers.

Franklin Templeton decided to integrate ESG in the investment process in 2013, when the firm established a centralised ESG team, according to Julie Moret, London-based head of ESG.

She said the ESG factors should not be treated as a separate objective. “It is really understanding how these additional new data sets aid in investment decision making.”

Moret explained that before the firm established the team, investment teams already assessed corporate governance factors, such as board structure, and the impact they have on valuations.

But issues such as climate-related risk were less understood in terms of how they impact valuations. The purpose of the ESG team is to partner with the different investment groups and give them a better understanding of ESG risks.

Although the initiative was established five years ago, the investment teams are still working on integrating the ESG factors.

“ESG integration is tailored within each investment groups because they need to reflect their own unique investment approaches,” she said.

For example, the firm’s global macro team has developed a proprietary ESG country index, which formalises ESG evaluations at a country risk assessment level, according to Moret. Within the index, the team developed 13 sub-categories, which cover governance indicators (such as corruption), social indicators (such as human capital) and environmental indicators (such as resource scarcity) that they use to score individual countries on a scale of 0-10.

In equities, the centralised ESG group has been working with the global equity group to develop a proprietary climate assessment risk framework, where it would identify companies that are well placed to benefit from a transition to a lower carbon economy, she added.

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