april 2020 an update on our esg scores...trends can be obfuscated in the short term by cyclical or...

An update on our ESG Scores

FRANKLIN TEMPLETON THINKSTM GLOBAL MACRO VIEWS

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APRIL 2020

Global Macro Views / An update on our ESG scores2

areas of risk. Within TGM, we are most interested in the projected “tails,” which signal major ESG shifts in either direction.

4. Time horizon: To benefit from ESG analysis, investors must have a sufficiently long time horizon. ESG factors guide a country’s longer-term fundamentals, but the underlying trends can be obfuscated in the short term by cyclical or temporary condi-tions. Conviction in an analytical view and patience to see that view come to fruition are requisites to successful ESG investing.

5. Engagement: Emphasis on a country’s long-term fundamentals provides an effective base from which to open communications with policymakers interested in discussing best economic practices. This dialogue is important in our efforts to evaluate ESG factors, and for government officials interested in the perspectives of private markets.

1. Integration: ESG is most effective when fully integrated into the other components of research, including traditional economic analysis and in person visits with policymakers, which help form our core macroeco-nomic views on a country. ESG factors are integrated into our analysis of economic issues such as growth and inflation.

2. Forward-looking: Focus is placed on forward-looking data points. Rather than current ESG performance, which is strongly correlated with income levels, we believe momentum, or change in score, is the measure that truly matters for both investment performance and for where capital can be deployed to generate the most posi-tive impact, in our view.

3. Focus on the tails: ESG is an important tool for identifying investment opportunities and for highlighting

ESG methodology The TGM-ESGI scoring is formed through a total of 14 subcategories (see GMS-9, page 4) deemed material to a country’s macroeconomic performance, covering topics from corruption to social cohesion to unsustainable environmental practices. The categories are scored from 0 to 100. Our research team uses a set of global indexes as a foundation and overlays our research views to create current and projected scores that reflect how condi-tions are expected to change over the medium term. These category scores are aggregated into a total ESG score by using an equal weight of 33% for governance, 33% for social and 33% for the environ-ment. The projected change in scores is simply the forecasted score minus the current score.

In this issue

For several years, Templeton Global Macro (TGM) has been at the forefront of incorporating environ-mental, social and governance (ESG) factors into sovereign fixed income investing. Our proprietary Templeton Global Macro ESG Index (TGM-ESGI) was one of the first methodologies in this space to focus on projected changes in ESG scores as a source of investment insight, as detailed in our original publication in February 2018, Global Macro Shifts issue 9—Environmental, Social and Governance Factors in Global Macro Investing [GMS-9].

On a semi-annual basis we release updates of our ESG research, in which we discuss current and projected scores along with a number of country case studies. In each edition we also discuss improve-ments and refinements in our measurement of ESG factors. This April 2020 publication provides updated TGM-ESGI scores for 56 countries as of February 29, along with brief case studies for specific countries. We discuss improvements to our methodology in this edition, most notably the incorporation of Health Security in the Social category, which adds insight into a country’s ability to cope with the COVID-19 pandemic. This particular edition also takes a deeper look at increasingly critical environmental issues, specifically focusing on water security, air pollution and deforestation.

A recap of TGM’s ESG philosophy and process

3Global Macro Views / An update on our ESG scores

In December 2019, the COVID-19 epidemic broke out in Wuhan, China, and started rapidly spreading, initially across Asia but soon affecting the entire world. This epidemic, which officially became a pandemic in March 2020, is one in a long list of outbreaks over the last couple of decades, including the Zika virus, Ebola, MERS and swine flu. It appears on track to be deadlier than all of those infectious diseases combined, if not properly contained.

Outbreaks like COVID-19 have long been both feared and antici-pated. It is a topic that has filled countless magazine covers, books and keynotes at conferences, many of which described the current situation in great and prescient detail. It was in 2014 after the outbreak of Ebola that former World Bank President Jim Yong Kim remarked that the international community had “fallen back into a lull and remains ill-prepared” for a new pandemic.1

That an increasingly globalized and urbanized world makes for fertile ground to facilitate the spread of diseases could be seen in early 2020, when the first cases of the novel coronavirus started showing up in some of the most interconnected cities of the world, such as New York, Milan and Singapore, before spreading out to hinterlands far and wide. One anecdotal example is the UK “super-spreader” who attended a business event in Singapore in late January, went skiing in France, returned to London from Geneva and visited a local pub in the following days as his travel partner continued on to Spain, all the while infecting people. In the current crisis, globalization and urbaniza-tion became an Achilles heel as the most open countries were affected first, and the most urbanized ones had the hardest time escaping the coronavirus impact even with—when going by normal standards—draconian containment measures in place.

World Health Organization (WHO) guidelines for prevention and control of respiratory infections—including measures like early and rapid recognition, and social distancing2—were implemented with mixed success in different countries, highlighting both strengths and flaws in the different approaches. While the jury

will likely remain out for quite some time in terms of lessons learned and potential best practices for future outbreaks, it is clear that some countries have thus far coped with adversity, with better success than others. That this is not simply a function of the quality of health care, but also brings in other aspects of governance, is perhaps best illustrated by Italy, which has the sixth highest life expectancy at birth3 and in a 2014 Organisation for Economic Co-operation and Development (OECD) report, saw its health care system being described as “uniformly impressive” in terms of outcomes, quality and efficiency.4 Despite such lofty praise, it turned out to be one of the hardest hit countries.

We believe that some of the social and governance aspects of handling the COVID-19 outbreak are already reflected in existing TGM-ESGI scores such as government effectiveness, social cohesion and the policy mix. Singapore’s near perfect response to the crisis can perhaps easily be summarized in its perfect score on all three of those indicators, while the issues faced by Italy are reflected in its rank just a little above the middle of the pack. In contrast, Brazil’s initial non-response perhaps fit its current below-average governance scores (which we do see improving).

But we think there is more to it than that, as other open countries like the US, France or the Netherlands undoubtedly have a high quality of governance and strong health care systems but still responded in a manner that arguably fell short of their normally high standards. The concept of health security comes into play here: how well are countries able to prevent, detect and cope with rapidly spreading epidemic diseases? Assessing countries on this basis requires a deeper understanding of biosafety practices, the quality of the epidemiology workforce, and a country’s laboratory systems, as well as its crisis communi-cation capabilities, surveillance and reporting infrastructure. In this version of TGM-ESGI, we are integrating a new Health Security subcategory to reflect these issues.

ESG scores in the context of the COVID-19 health crisis


Updated TGM-ESGI scores The results from our February 2020 scoring update are shown in Exhibits 1 and 2. We have continued to focus on a set of 56 countries, consistent with the recent updates.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE SCORES BY COUNTRY (TGM-ESGI)Exhibit 1: TGM-ESGI scores: Current and prior updates As of February 2020, and August 2019

Source: TGM-ESGI. Our medium-term projections are for the next three years.

100

90

80

70

60

50

40

30

20

10

Vene

zuel

aAn

gola

Moz

ambi

que

Nige

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mbo

dia

Ethi

opia

Mya

nmar

Iran

Leba

non

Sene

gal

Ivor

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ast

Tanz

ania

Zam

bia

Phili

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esIn

dia

Ecua

dor

Ugan

daSr

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done

sia

Keny

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rain

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Mor

occo

Ghan

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Viet

nam

Sout

h Af

rica

Mon

golia

Russ

iaBr

azil

Rwan

daAr

gent

ina

Chin

aM

exic

oCo

lom

bia

Peru

Saud

i Ara

bia

Gree

ceTh

aila

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rbia

Chile

Urug

uay

Croa

tiaIta

lyPo

land

Hung

ary

Mal

aysi

aUA

ESl

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iaIs

rael

Kore

aLi

thua

nia

Port

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Japa

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ain

Czec

h Re

publ

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ther

land

sAu

stra

liaFr

ance

Irel

and UK US

New

Zeal

and

Sing

apor

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nada

Swed

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Denm

ark

Switz

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nd

2

1

0

-1

-2

-3

Sri L

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Italy

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land

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Spai

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Mex

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Aust

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New

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Thai

land

Keny

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Gree

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rain

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ana

Indo

nesi

aSe

rbia

Exhibit 2: TGM-ESGI scores: Projected change As of February 2020

February 2020 August 2019


Governance Environment Social

Exhibit 4: Projected TGM-ESGI score comparison: February 2020 vs. August 2019 As of February 2020


2

1

0

-1

-2

-3

Sri L

anka

Italy

Vene

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a US UKPo

land

Indi

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Spai

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Aust

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New

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Swed

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Peru

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Thai

land

Keny

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bia

Gree

ceUk

rain

eVi

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ana

Indo

nesi

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rbia

Exhibit 3: TGM-ESGI Scores: Projected change by E, S, and G factorsAs of February 2020

2

1

0

-1

-2

-3

Sri L

anka

Italy

Vene

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a US UKPo

land

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Peru

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Thai

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Keny

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February 2020 August 2019


in the previous two rounds to –1.3 in this April 2020 release. The overall average projected change in score remained steady versus the previous release at –0.4.

Most notably, Ukraine changed from showing a deteriorating score previously to now having a positive projected change due to a more optimistic outlook on business climate and government effectiveness now that President

The number of countries where we see positive projected changes in TGM-ESGI scores continues to decline. In February 2019 we saw 15 improving countries with an average projected change of +2.4 and in August 2019 we saw 12 countries with an average projected change of +1.3. In this update we still see 12 coun-tries with a positive change of +0.9 on average. For countries seeing a deterio-rating projected score, the average decline improved marginally from –1.6

Volodymyr Zelensky has achieved a parliamentary majority. Chile and Peru changed from countries with improving outlooks to being neutral, while Argentina and China are now faced with a deteriorating projected ESG score. A handful of countries, including France, South Africa, Sri Lanka and India, were previously seen to face negative ESG momentum and have seen that projected negative change increase in magnitude.

Of the countries that previously saw nega-tive and positive projections, it is notable that a number of them are now seeing smaller projected changes, which in many cases is related to previously projected changes becoming realized (and the projected change reverting to zero). For instance, Venezuela was previously seen to deteriorate on infrastructure, while Brazil was seen to improve on business climate. Now that these changes have taken place, their current scores have adjusted higher or lower, and projec-tions became smaller or stable. The following charts show the path that four selected countries have walked and how their projections have come true or in some cases changed direction in line with events.

Countries with notable projected-score changes due to ESG factors

Changes in TGM-ESGI scores that reflect projections becoming reality

51

50

49

48

47

SELECT COUNTRIES WITH PROJECTIONS BECOMING REALITYExhibit 5: Former projections vs. actual path and current projections As of February 2020


BrazilESG Scores

Former projections Actual path Current projections

Feb-18 Jul-19 Nov-20 Mar-22 Aug-23

25

20

15

10

5

VenezuelaESG Scores


50

45

40

IndiaESG Scores


70

69

68

67

66

65

PolandESG Scores



Benchmark selectionWhen constructing the TGM-ESGI, our research team overlays its views on a set of representative global indexes published by reputable sources that often form an aggregation of other sources of data. On occasion we make changes to our selection of indexes as publications are either discontinued, or because we adjusted the scope of our index.

Health securityWhile previous iterations of TGM-ESGI have already included investments and the state of a country’s healthcare system through the Human Capital indicator, in this version we are explicitly adding a new Health Security subcategory to the index. This new subcategory provides a measure of the coping ability of countries with epidemic diseases and reflects the quality and robustness of countries’ health systems, as well as their ability to prevent, detect and respond swiftly to the spread of such diseases.5 This is especially relevant in light of the current COVID-19 epidemic.

The Health Security index gives top ranks to many developed markets, with the United States, the United Kingdom, the Netherlands, Australia and Canada forming the top five countries. From the emerging market universe we find Thailand in 6th place, Malaysia 18th and Brazil in 22nd place, suggesting that these countries may be relatively better positioned than their peers to deal with the current crisis. Some of the significant emerging and frontier markets with a weaker position are Sri Lanka, Nigeria, Ukraine and Egypt, which all score outside of the top 75.

Lastly, it is also interesting to note that in countries such as Brazil and Indonesia, Health Security rankings significantly outperform other social indicators such as quality of infrastruc-ture, the state of the labor market or social cohesion and therefore the new index provides a new and uncorrelated signal.

Energy securityIn this April 2020 update, we have refined the Energy Security subindex, which constitutes one-third of the Resource Insecurity indicator and accounts for approximately 3.7% of the overall TGM-ESGI score. Formerly, we used the World Energy Council’s (WEC) Energy Trilemma, Energy Security subindex, which provided a measure of import dependence and diversity of elec-tricity generation. We have now switched to using the complete Energy Trilemma, as its incorporation of energy access and sustainability of energy provision provides a more comprehensive view of energy security that incorporates both current and future as well as external and domestic energy security.6

To illustrate why a simple measure of energy security with heavy emphasis on import dependence may skew perceptions, consider the cases of Singapore and Angola. Singapore ranks 123rd out of 128 on the WEC’s energy security subindex, while Angola ranks in 6th place. In particular, Singapore’s high energy import dependence and lack of supply diversity—95% of its electricity is produced using natural gas7—give it a poor ranking, while Angola’s self-sufficiency as one of the top oil exporters and indeed net exporters of energy rank it among the best performing countries.

Yet despite being self-sufficient, Angola’s internal energy situation is far less rosy. Estimates of the International Energy Agency say that only 35% of Angolans (and far lower numbers still in rural areas) had access to electricity in 2016. Angola’s power sector suffers from issues such as insufficient power generation, limited revenue collection and lack of skilled workers.8 While we recognize that having abundant natural resources and being able to export energy are an economic boon, both the domestic and external situations need to be taken into consideration in our view.

In addition, the full Energy Trilemma incorporates the environ-mental sustainability of energy systems. In a world where fossil fuels are by some estimates expected to become depleted in upcoming decades, and in which the usage of greenhouse gas-producing forms of energy is increasingly becoming discour-aged (through various international agreements such as the Paris Accord), the ability of a country to pivot to renewable sources of energy may bode well for its future energy security.

The growing importance of environmental factorsIn our previous ESG update (October 2019), we described how we brought the weighting of environmental factors to an equal weighting (33%) with social and governance factors, up from the prior lower weighting of 20%. Previously, we felt that environmental issues were not always imminent drivers of risk and reward in sovereign fixed income investments, but that the impact of such factors was more critical over the longer run—indeed, in many cases likely the most critical of all.

We changed the weighting based on the recognition that environ-mental factors were becoming more pressing immediate concerns not only in smaller emerging markets but also in the major emerging peers and even developed markets. In addition, we came to believe that environmental issues should not be viewed strictly in isolation, as they can have spillover effects on social and governance factors.

Refinements to our ESG methodology


These issues have remained at the forefront of our mind in recent times as the global impact of climate change appears to be accelerating, with temperatures in the recent five-year period rising significantly, compared with the first half of the previous decade.9 The prevalence of droughts has gone up across the globe10, while species extinction and the global decline of nature are ongoing at unprecedented rates.11 While in many ways this remains a slow moving disaster, increasingly we are seeing direct economic and credit impact as environmental issues spill over to social and governance factors.

Countries with notable score changes due to methodology refinementsThe change in the Energy Security subindex had a marginal impact on the TGM-ESGI scoring for the countries, given its small weight of 3.7%. Nevertheless, some of the countries with the biggest changes in their index values were Angola (from 100 to 30), Vietnam (from 90 to 30) and Nigeria (from 50 to 0). Meanwhile, Singapore improved (from 0 to 70), as did Ireland (from 20 to 80) and Japan (from 40 to 80).

Case studies In the following case studies, we highlight several countries that are currently seeing major environ-mental issues unfold. In the cases of India and Brazil, these issues are currently projected to lead to a decline in ESG scores. In the cases of China, Australia and Egypt, they are topics we are closely monitoring as the situation for now appears to be stable or even improving, but in the future could present significant challenges for the countries affected.

Two countries where environmental issues are projected to lead to ESG declines

India: An unfolding water crisis• India is suffering from the worst water crisis in its history, and

millions of lives and livelihoods are under threat. Currently, 600 million Indians face high to extreme water stress and about 200,000 people die every year due to inadequate access to safe water.12

• The crisis is only going to get worse. By 2030, the country’s water demand is projected to be twice the available supply, implying severe water scarcity for hundreds of millions of people and an eventual ~6% loss in the country’s GDP (gross domestic product).13 As per the report of the National Commission for Integrated Water Resource Development, the water requirement by 2050 in a high use scenario is likely to be 1,180 billion cubic meters, whereas the present-day availability is 695 billion cubic meters.

• Facts listed by the Planning Commission of India (NITI Aayog): 600 million people face high-to-extreme water stress in India, 75% of households do not have drinking water on the premises, 84% of rural households do not have piped water access, 70% of India’s water is contaminated, India is currently ranked 120 among 122 countries in the water quality index and 40% of India’s population will have no access to drinking water by 2030.

• In theory, India receives enough rain every year to meet the needs of over a billion people. According to the country’s Central Water Commission, it requires at most 3,000 billion cubic meters of water annually and receives 4,000 billion cubic meters of rain. Water scarcity is therefore mostly man made due to mismanagement of water resources.

100

90

80

70

60

50

40

30

20

10

Exhibit 6: India: Current and projected conditions (TGM-ESGI)As of February 2020

TGM-ESGI Score


Environment Social Governance

Current Projected

30 29

43 4350

46


• The major reasons for water scarcity in India are inefficient use of water for agriculture due to traditional techniques of irrigation, as well as pollution due to sewage and waste-water drainage into traditional water bodies, and the release of chemicals and effluents into rivers, streams and ponds. A booming economy, population growth and rapid urbaniza-tion have also had considerable impact on India’s demand for water, and changes in food consumption, lifestyle patterns and methods of land use all also play a major role.

• Being an agrarian country, irrigation by far is the largest use of India’s water reserves, accounting for 78% of total water reserves. Groundwater, which makes up 40% of the country’s water supply, is an important source for irrigation as well as for domestic and industrial usage. It is also a major source of drinking water in urban and rural India.

• 45% of total irrigation and 80% of domestic water come from ground water reserves. In some states such as Delhi, Punjab, Haryana and Uttar Pradesh, over-exploitation of groundwater has led to water scarcity, while in others such as Tamil Nadu, Karnataka and Andhra Pradesh, poor aquifer properties are responsible for water scarcity.

• With increasing population pressures, industrial growth and the unprecedented pace of urbanization, the groundwater is extracted from a lower and lower level at a much faster rate than rainfall can even replenish.

• The government recently formed a new Jal Shakti (water) ministry, which aims to tackle water issues with a holistic and integrated perspective on the subject. The ministry has announced an ambitious plan to provide piped water supply to every household in India by 2024.

• A rapidly urbanizing and developing India needs to drought-proof its cities and rationalize its farming. Water-harvesting must be a priority, alongside mechanisms for groundwater replenishment. As it is, every summer is hotter and less bearable. If Indians run short of water as well, one of the world’s most populous nations could well become unlivable.

• Other ESG factors: We see a deteriorating score on quality of policy mix and strength of institutions. In recent months, we have seen the focus of the government shifting toward a more nationalist agenda, putting structural reforms like land and labor reform on hold. The fiscal consolidation path has also hit the brakes, and available policy space has been reduced.

• Health Security: India ranks 57/195 on the Health Security benchmark. Though it scores low on access to healthcare, the overall score reflects relatively strong benchmark results on rapid response and the quality of the health system in general when it comes to availability of equipment.

100

90

80

70

60

50

40

30

20

10

Exhibit 7: Brazil: Current and projected conditions (TGM-ESGI)As of February 2020

TGM-ESGI Score



Current Projected

7471

40 4044

48

Brazil: Amazon deforestation threatens long-term sustainability • The Amazon is one of the largest “carbon sinks” in the world.14

If 60% of the forest were to degrade, that could unleash the equivalent of five or six years’ worth of global emissions.15

• Historically, deforestation in the Amazon has come from cattle ranchers that clear rainforest in order to make room for their cattle to graze.16 These activities have been a major source of pollution, biodiversity loss and greenhouse gas emissions over the years.17 Between 1970 and the mid 2000s, over 600,000 square kilometers of rainforest have been destroyed.18

• In a nod to this largely rural, conservative base, President Jair Bolsonaro has greenlighted an acceleration of deforesta-tion in the Amazon rainforest—a singularly important environmental resource. Since he came to office in January 2019, an area bigger than Luxembourg has been razed and deforestation has been gaining momentum.

• The Amazon is also the source of much of Brazil’s rainfall. This is an important point as record-setting droughts have been accelerating in recent years, for instance occurring in 2005, 2010 and 2015–2016. Deforestation exacerbates climate change, and the impact of rising temperatures could be declines of 30% to 60% in crop yields of, for instance, maize in northeast Brazil.19

• Brazil ranks among the countries with the highest forest cover in the world (62% of its landmass is covered by forests),20 but in an absolute sense it also has the greatest forest area in the world after only Russia.21 Rapid rates of deforestation have not only domestic but also global environmental repercussions, attracting international attention to the issue.


• Last year France threatened to block the European Union-Mercosur trade pact due to Brazil’s stance on the Amazon. In addition, deteriorating conditions in the Amazon have the potential to spark consumer and company-specific boycotts of Brazilian goods. For instance, in the past, bouts of deforestation have prompted international boycotts of beef products that were sourced from grazing lands located on deforested areas.

• Recently, Bolsonaro assigned his vice president, Hamilton Mourão, to lead a newly formed Amazon Council.

• Other ESG factors: The economic crises and political scandals of the past have sparked a period of significant reform in Brazil. Already passed reforms addressing corruption and privatizations should improve the business climate, and pension reform will have a similar effect. There is a shift from public to private-driven growth. We believe Congress is likely to take action on additional reforms (e.g., fiscal emer-gency bills, public administration and potentially tax reform).

• Health security: Brazil scores 22/195 on the Health Security benchmark, which reflects high scores on detection, prevention and rapid response to epidemics. More problematic areas for the country are scores relating to access to healthcare and the general risk environment (socio-economic and political).

Three countries with stable score projections but material environmental issues we monitor

Egypt: An upstream dam threatening the water supply• Egypt gets approximately 90% of its water from the Nile

River,22 and 95% of the country’s 100 million people live along the banks of the Nile and in the Nile Delta.23 The majority of the Nile’s water flows from the Blue Nile in northern Ethiopia.

• With the Grand Ethiopian Renaissance Dam (GERD) project, Ethiopia has been constructing a dam upstream since 2011 that when completed will form Africa’s largest hydro-electric plant and alleviate its own electricity shortages. It also threatens to diminish water flow on the Nile, unleashing potentially significant humanitarian and economic impacts on Egypt. In particular, agriculture would be hard hit.

• Once construction is completed, filling up the dam could take anywhere between five years and a decade, during which water flow downstream would be affected. The greater the speed at which the reservoir is filled, the more water levels in those years will be affected. Beyond that, evaporation of water from the dam’s reservoir may lead to declining water availability in the Nile.

• Although construction on the GERD was said to be about 70% complete in late 2019, reports emerged late last year that the project’s completion had been delayed two years until 2022.

• There are ongoing talks between Egypt and Ethiopia over the GERD project. The latest rounds of negotiations have not yielded substantive solutions to the disputes over the pace at which the dam reservoir will be filled, and the subsequent river flow levels. However, third parties (most recently and notably, the US) have started getting involved to avoid an outcome that could clearly harm order in the region.

• Other ESG factors: The government has achieved primary surpluses and debt levels are trending downward, while much of the fuel subsidies have been removed. As natural gas production from the Zohr gas fields come online, energy secu-rity is projected to improve.

• Health Security: Egypt receives a rank of 87/195 on the new Health Security benchmark, reflecting low scores on the quality of its health system in terms of capacity, availability of equipment and access to it by the population.

90

80

70

60

50

40

30

20

10

100

Exhibit 8: Egypt: Current and projected conditions (TGM-ESGI)As of February 2020

TGM-ESGI Score



Current Projected

63 64

39 39 36 36


Australia: Climate change vulnerability and declining biodiversity• Australia is the world’s driest continent and considered one of

the most vulnerable developed countries to the effects of climate change. According to the Bureau of Meteorology, climate change is increasing the frequency and severity of bushfires, with the annual season now starting significantly earlier in the spring in the southern and eastern parts of Australia.

• According to the SPEI Global Drought Monitor, eastern parts of Australia have spent much of the last two decades in severely dry to extremely dry conditions, which presents a clear deterioration from the decades that came before it. Australia’s 2019–2020 bushfire season has been especially devastating, worsened by some of the highest temperatures and lowest levels of rainfall on record and causing billions in damages.

• The country’s wildlife and biodiversity is worsening, with one of the highest rates of species extinction seen anywhere in the world—1,770 species are currently endangered and 100 have gone extinct in the last 200 years—due to climate change and the destruction of natural habitat because of, for instance, deforestation and the introduction of invasive species.24 A decline in biodiversity can lead to a breakdown in the functioning of ecosystems, with many unforeseen consequences.

• Australia is in the top 10 countries in terms of greenhouse gas emissions per capita and one of the most carbon-inten-sive economies in the world. Emissions are still on the rise. The country ranks 12th in terms of its overall ESG score, but it’s environmental scores are the lowest of any country in the top 15.

• Other ESG factors: Australia has strong institutions despite frequent legislative deadlock, and while social divisions have increased, they are seen to be lower than in some other OECD (Organisation for Economic Co-operation and Development) countries. Australia also has healthy demo-graphics relative to its peers.

• Health Security: Australia ranks 4/195 on the new Health Security benchmark, reflecting the second highest score world-wide on detection and reporting of epidemics, with top scores on laboratory systems and the epidemiology workforce.

China: Challenges abound but it’s taking action on the environment• China faces heavy pollution and poor air quality due to an

industry-driven growth model. Pollution from coal plants, vehicles (over 5 million cars in Beijing25 and more than 2.5 million in Shanghai,26 for instance) and other manufacturing industry worsen the situation.

• According to the World Health Organization, air pollution kills 1 million Chinese people a year, and per research from the Chinese University of Hong Kong, it costs the Chinese economy 267 billion yuan a year (US$38 billion). This (air pollution) also notably impacts crop production: 20 million tonnes of rice, wheat, maize and soybean are lost yearly.27

• But China has made strides in recent years as the country’s PM2.5 (fine particulate matter) concentrations fell by 33% from 2013–2017 in 74 cities. In August 2019, Beijing had the lowest PM2.5 on record, and Beijing is on track to drop out of top 200 most polluted cities. The country strengthened its environmental agency and started actively penalizing companies for violations.

• The government started addressing pollution after an espe-cially bad 2012–2013 by increasing regulation which aimed to reduce PM2.5 by more than 10% over 2012–2017 and introduced a carbon trading scheme to cap emissions. Meanwhile, China is focused on developing other energy sources like nuclear, hydro and compressed natural gas, while it is actively closing outdated capacity of industrial sectors like iron, steel, etc.

• China faces soil erosion and desertification around the Gobi Desert. The causes are deforestation, overgrazing and mismanagement of water resources, and the roots of the

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Exhibit 9: Australia: Current and projected conditions (TGM-ESGI)As of February 2020

TGM-ESGI Score



Current Projected

67 67

82 82

100 100


issue lie in the early years of the People’s Republic of China, when it razed farms and cleared land to build cities and create infrastructure, leaving land unprotected against wind erosion. China is fighting this soil erosion with the “Great Green Wall” around the Gobi and has been doing so since the 1950s. This means planting millions of plants along the border of northern China’s encroaching desert and is having some success.

• China has 20% of the world’s population and 7% of its fresh-water reserves.28 85% of its water reserves is used for agriculture and industry, and per the World Bank China was using 10 times more water per unit of production than the average industrialized country.29 Water pollution affects 90% of groundwater in cities as well as 70% of rivers and lakes.30

• Other ESG factors: Power concentration in China is likely to have both pros and cons and in our view the policy mix could deteriorate as the government becomes threatened by an economic slowdown.

• Health Security: China ranks 51/195 on the new Health Security benchmark. It receives low to average scores on prevention, detection and rapid response.

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Exhibit 10: China: Current and projected conditions (TGM-ESGI)As of February 2020

TGM-ESGI Score



Current Projected

49 49

62 62

54 52


Global Macro Views is a complementary publication that will update and/or amplify the periodic research-based briefing on global economies called Global Macro Shifts. Both feature the analysis and views of Dr. Michael Hasenstab and senior members of Templeton Global Macro. This economic team, trained in some of the leading universities in the world, integrates global macroeconomic analysis with in-depth country research to help identify long-term imbalances that translate to investment opportunities.

Michael Hasenstab, Ph.D. Executive Vice President, Portfolio Manager, Chief Investment Officer

Templeton Global Macro

Jaap Willems Senior Quantitative Research Analyst


Calvin Ho, Ph.D. Senior Vice President, Portfolio Manager, Director of Research


Hyung C. Shin, Ph.D. Vice President, Senior Global Macro & Research Analyst


Diego Valderrama, Ph.D. Senior Global Macro & Research Analyst


Attila Korpos, Ph.D. Senior Global Macro & Research Analyst


Primary contributors to this issue


WHAT ARE THE RISKS?

This material reflects the analysis and opinions of the authors as at 23 April 2020 and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton Investments. It is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed and the comments, opinions and analyses are rendered as at the publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market, industry or strategy. All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with merging markets are magnified in frontier markets. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline.

Endnotes1. Source: Skoll World Forum, Oxford, UK, 2017.2. Source: WHO Guidelines: Infection prevention and control of epidemic, 2014.3. Source: United Nations Development Programme, 2019 Human Development Index Rating4. Source: OECD Reviews of Health Care Quality: Italy 20145. The “Global Health Security index” is used as the benchmark for the new Health Security subcategory. The index covers 195 countries and represents a comprehensive collection of

34 indicators reflecting the capacity of health security in the context of each country’s health system, as assessed by a group of experts based on available data. It incorporates indicators reflecting the ability of a country to prevent, detect, report and respond to spreads of an epidemic.

6. The “Energy Trilemma” is an annual report published by the World Energy Council, which ranks countries based on a combination of energy security, energy equity and environmental sustainability of energy production. The ranking on this index is used as the benchmark for the energy security factor in the TGM-ESGI Environment category as of February 2020, due to its reflection of domestic, external and future energy security. It replaces the previous benchmark used for the TGM-ESGI, which was the “Energy Trilemma, Energy Security subindex,” as that reflected a more narrow view of energy security that mostly reflected import dependence and reliability of energy generation.

7. Source: US Energy Information Administration.8. Source: US Energy Information Administration.9. Source: World Meteorological Organization (WMO), 2015–2019.10. Source: Standardised Precipitation-Evapotranspiration Index.11. Source: Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), April 2019.12. Source: WRI Aqueduct; WHO Global Health Observatory.13. Source: McKinsey & WRG.14. Source: World Economic Forum, 13 February 2020.15. Source: National Geographic, 27 August 2019.16. Source: Yale School of Forestry & Environmental Studies, March 2020.17. Source: Food and Agriculture Organization of the United Nations (FAO) March 2020.18. Source: BBC News, 4 December 2006.19. Source: Agricultural Water Magazine, May 2019.20. Source: CIA World Factbook, 2011.21. Source: World Bank, 2016.22. Source: BBC News, 13 January 2020.23. Source: CIA World Factbook, March 2020.24. Source: Australian Government Department of Agriculture, Water and Environment, March 2020.25. Source: Xinhua, 2 February 2017.26. Source: Shanghai Daily / Shanghai Urban-Rural Construction and Transportation Development Research Institute, 22 March 2016.27. Source: South China Morning Post, 2 October 2018.28. Source: The Economist 13 October 2013.29. Source: National Bureau of Statistics of China, China Statistical Yearbook 2015.30. Source: Embassy of the People‘s Republic of China, Sept 2006.


Notes

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april 2020 an update on our esg scores...trends can be obfuscated in the short term by cyclical or...

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