Sustainable investing, a rather popular thing to say these days, is not merely about “doing good and doing well”. As the experience of asset manager Templeton Global Equity Group has shown, sustainable investing can drive outperformance as well.
Since 2010, the funds focused on ESG (environment, sustainability and governance) have outperformed non-ESG funds by close to 5%, with the difference widening in the last five years.
“This has highlighted that ESG investment has not been lowering investment returns,” says Templeton in a press release. Along with better returns, there is also a growing pool of investors’ money that have made their way into can be deemed as “sustainable” assets.
Tellingly, the interest is not confined to just the developed markets such as Europe where ESG was first actively promoted. According to statistics compiled by financial researcher Morningstar, assets in European sustainable funds saw a 179% growth to US$1.36 trillion ($1.81 trillion) between 2016 and 2020.
Meanwhile, the growth of such assets in North America was up 193% to US$235.7 billion, while Asia, coming off a much smaller base, is speeding ahead with a 447% jump in the same period to hit US$50.8 billion. Such numbers, already big, are seen to grow even more.
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Global ESG assets are on track to exceed US$53 trillion by 2025, says Bloomberg Intelligence, representing more than a third of the US$140.5 trillion in projected total AUM.
ESG investing is not just about the returns but also for the clear and present reason. According to a report from the international think-tank Climate Action Tracker, the global average temperature has risen 1.1°C above pre-industrial levels.
If no actions are taken, the global average temperature will rise by between 4.1°C and 4.8°C by 2100. Focusing on the imminent threat of climate change, 37 countries have pledged to reach net-zero emissions by 2060. The US, China and Europe have all placed carbon neutrality as a strategic priority for future development.
“The investment opportunities under the transition to a greener economy, therefore, should not be underestimated,” says the asset manager.
“Investors’ focus on ESG is significant and growing around the world. As an active manager, we believe in incorporating sustainability and ESG factors into the investment process to achieve improved risk-adjusted returns,” says Michelle Auger, global ESG strategy director at Franklin Templeton.
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“At our most recent earnings call [2QFY2021 ended March 31], it was announced that over 93% of our AUM represents strategies that consider ESG factors as part of the investment process and AUM with a specific focus on ESG totalled over US$175 billion at quarter-end,” says Auger in an email to The Edge Singapore.
Tying investing trends together with climate change is a nascent move but the effects are already felt. An effective climate change strategy should therefore invest “across the entire universe of opportunities”, says Craig Cameron, portfolio manager for the Templeton Global Climate Change Fund.
These can be sorted into three categories. First are the “solutions” companies, with the majority of their revenues coming from products and services that reduce emissions, improve resource efficiency and protect against the physical consequences of climate change.
Next are the “resilient” companies, with relatively low carbon and resource intensity and with solutions representing less than 50% of revenues.
Last are the “transitioning” companies, which are moving away from moderate to high emissions or resource intensity towards the more sustainable models above.
Launched in April 1991, the Templeton Global Climate Change Fund has a size of EUR849.97 million ($1.37 billion) as of April 30. The fund has an annualised performance of 7.04% since its inception in August 2004.
“Compared to many of our peers that only focus on alternative energy, the Templeton Global Climate Change Fund is a global equity fund with close to 70% of the portfolio investing in climate change solutions companies,” says Templeton.
“A further 22% of companies under the portfolio are currently transitioning, with the remaining 10% in resilient companies, to support investors seeking companies with solid fundamentals and strong climate change prospects,” says the asset manager.
As of February, 50% of the companies under the portfolio are from Europe while 23% respectively in North America and Asia. Sector-wise, the fund focuses on investing in industrial solutions, raw materials and technology.
“We search for carbon reduction opportunities beyond environmental sectors for broad impact and optimal risk/reward outcome,” says Templeton’s Cameron.
“Our emphasis on company self-decarbonisation, in addition to solutions providers, offers broader sector exposure than peers.”
“We believe mitigating climate change is one of the key challenges facing humanity,” he adds. “This will impact all industries globally and will require significant investment and adaptation, establish new winners and losers and create opportunities beyond just environmental sectors.”
