An Integrated Approach to Managing ESG Risks and Opportunities

Information, data and research are the fuel for investment decisions. Over the years, as new information has emerged and evolved, investors have found innovative means to harness new insights to help inform their decisions. Today, some forward-looking investors are deepening their focus on environmental, social and governance (ESG) analysis to provide additional perspectives to complement existing research efforts. Julie Moret, Franklin Templeton’s head of ESG, explains how ESG contributes to an evolved investment evaluation framework and serves as a tool to assess broader holistic risks.

We are living in a rapidly changing world. Sustainability challenges such as resource efficiency, climate change impacts and transitional risks continue to grow in relevance, as does the growing number of policy and regulatory pressures targeting sustainability issues.

We are seeing a more acute awareness among investors of an alignment between sustainability and financial impact, as evidenced by the growing number of signatories to industry-led initiatives such as the Principles for Responsible Investment (PRI).

An international group of institutional investors developed the PRI to reflect the growing importance of environmental, social and corporate governance (ESG) issues within investment practices. Since its launch in 2006, nearly 2,000 signatories representing $81.7 trillion in assets under management1 have signed up to the principles. Signatories commit to integrate ESG considerations into investment decision-making, ownership practices and reporting.

Despite that growth, there remains variability of interpretation and implementation of ESG practices. This is compounded by the tendency across the investment world to use a confusing and often interchangeable array of terms and acronyms, which in some cases actually refer to different concepts and objectives.