Overview and introduction
Templeton Emerging Markets Investment Trust (TEMIT) has a diversified portfolio of around 80 high quality companies, actively selected for their long-term growth potential, sustainable earnings and with due regard to environmental, social and governance (ESG) attributes. TEMIT’s research-driven investment approach and strong long-term performance has helped it to grow to be the largest emerging markets investment trust in the UK, with assets of £2.6 billion as at 31 March 2021.
The Board receives regular reports on the policies and controls in place on ESG. The Board has reviewed and fully supports the Franklin Templeton Stewardship Statement and its Sustainable Investing Principles and Policies.
Franklin Templeton supports the UK Stewardship Code, and seeks to protect and enhance value for our shareholders through active management, integration of ESG factors into investment decision making, voting and company engagement. Franklin Templeton is a signatory to the Principles for Responsible Investment (“PRI”) from 2013 and an active member of a wide range of organisations and initiatives that work to promote ESG integration and responsible investment. As a signatory, the Investment Manager reports annually on its progress and in 2020 (the latest statistics available) ranked ahead of the peer median score in all categories. A link to the PRI Transparency Report and policies relating to responsible investing are available on the Company’s website – www.temit.co.uk.
FTEME’s investment philosophy is focused on investing in companies with sustainable earnings power at a discount to intrinsic value. It seeks to capture the growth potential of emerging market companies and believe that this is best achieved by employing a bottom-up and fundamental security selection process. It conducts in-depth proprietary company research with a long-term and independent perspective.
FTEME believes in the responsible stewardship of clients' capital and that ESG factors create risks and opportunities for companies. ESG analysis is therefore integrated alongside fundamental bottom-up analysis and FTEME engages with companies as active owners on behalf of clients. As investors with significant scale across emerging markets, FTEME believes that its engagement efforts are key to developing detailed understanding of companies and to improve outcomes for shareholders as well as stakeholders more broadly.
FTEME’s investment process leverages the strength of its investment team and is aligned to its investment philosophy. The three broad stages comprise: idea generation, stock research, and portfolio construction and management. The process is designed to be repeatable and embeds risk management as well as ESG integration throughout these stages.
FTEME analysts conduct rigorous analysis to assess whether a company has sustainable earnings power, and to establish a proprietary estimate of its intrinsic worth. By integrating ESG analysis with traditional business and financial analysis it also seeks to gain insights into the quality and risks of companies.
As part of assessing a company’s sustainable characteristics, FTEME seeks to develop a deep understanding of a company’s ESG practices. This supports the identification of business models that are most likely to sustain high returns and resist competitive pressure over time. ESG factors can have a material impact on a company’s current and future corporate value and therefore ESG considerations are an embedded component of the rigorous fundamental bottom-up research that the team conducts.
To illustrate Franklin Templeton’s approach to ESG and the way in which this is integrated in the research process set out below is a summary of research carried out on two companies in the past year.
|Summary of the Company||Analysis|
|One of the largest cement producers in South East China Over 80% of the company’s revenue comes from cement production which requires combustion of fossil fuels and with at present no meaningful and viable economic alternative. Global tightening of environmental standards and pressure in China to reduce emissions may lead to potential operating & compliance costs.||The company is in compliance with local standards and has improving emissions intensity figures. Management integrates ESG KPIs in staff remuneration at various levels. The company has a stated intention to improve carbon management further via technology upgrades. The company was a participant in the Guangdong province’s pilot carbon trading programme. While the details of the imminent nationwide carbon trading system are yet to be released, the company is confident that they are well equipped to face the challenges of carbon peak by 2030. We encouraged the company to join the Global Cement and Concrete Association, a commitment to ensure sustainability for the industry and to improve reporting standards which is underway. Conclusion: Improving emissions intensity, compliance with local standards, and management intentionality to improve further suggests low ESG risk and strong profile within sector. Given potential emissions costs in the future to Chinese cement manufacturers however, we have factored this into the company valuation by adjusting our cash flow forecasts|
Our research analysts conduct ESG analysis alongside fundamental bottom-up analysis. They analyse ESG factors which may affect growth potential and asset values with the same level of rigour as traditional risk metrics. By integrating ESG analysis with traditional business and financial analysis we seek to gain insights into the quality and risks of companies. This allows usto identify those business models most likely to resist competitive pressure and sustain high returns. The process aims to understand management’s ability to generate sustainable earnings, understand their motivation and determine whether their interests are aligned with minority investors.
Our analysts seek to identify material ESG issues and are guided by ESG Sector Framework Guides prepared by Franklin Templeton’s dedicated, independent ESG team. The frameworks have been informed by the Sustainability Accountings Standards Board (“SASB”) and identify a minimum set of ESG issues most likely materially to impact the operating performance or financial condition of a typical company in its industry group.
Rather than create a niche ESG research function in a separate silo, one of our key strategies for effective integration is to keep ESG considerations embedded in the work of its mainstream research teams. While consideration of material ESG issues is already an element of analysts' fundamental bottom-up research, Franklin Templeton's dedicated ESG team supports us to anticipate and translate ESG risks and opportunities in the investment process. This support is provided through access to additional ESG-related analysis and training, thematic research, and enhancements to processes.
FTEME’s primary source for gathering information on ESG is through engagement with management, financial statement analysis, corporate reports and reference to third party providers of dedicated ESG research such as MSCI and Sustainalytics. In addition, we are supported by independent risk consultants in Franklin Templeton’s Investment Risk Management Group, as well as its dedicated ESG team. The Investment Risk Management Group uses industry-leading tools to provide a top-down, portfolio level perspective on ESG issues, while ESG specialists engage and support our understanding of the impact and scope of material ESG issues and can provide guidance on emerging ESG themes.
Voting and engagement - with examples of positive results
FTEME conducts a significant number of company meetings - typically over 2000 a year - using its industry leading research footprint of over 80 investors in 14 countries where it seeks to gain a number of fundamental and ESG insights. We view this along with voting and engagement as part of its broader objective of responsible stewardship on behalf of clients.
As an active owner we seek to engage with companies on material issues via several approaches including management and board meetings, letter writing, proxy voting, and shareholder resolution filing. The approach to voting is designed to enhance shareholders' long-term economic interests. All voting decisions are made in-house by our analysts/portfolio managers and are undertaken in accordance with Corporate Governance Principles and in line with clients’ best interests.
Engagement efforts are not limited only to companies. We also use Franklin Templeton's wide footprint and relationships with governments and regulators to foster positive outcomes. Notable efforts in this arena include pushing for better standards of corporate governance and reforms. We believes that these improvements should in turn help boost economic growth and profitability for listed companies.
To illustrate Franklin Templeton’s approach to active ownership set out below is a summary of engagement with two investee companies in the past year.
|Summary of the company||Actions|
Asian nutritional product manufacturer
Topic: Franklin Templeton raised concerns around lack of board independence given that several directors had served for 10 years or more.
|Franklin Templeton sought change in the board structure, with the company acknowledging that they are open to change. The company is considering new board appointees with fastmoving consumer goods experience and is willing to listen to referrals, including overseas candidates to broaden the base of experience which the board brings|
Commercial bank in China
Topic: ESG and accountability disclosures were considered to be inadequate.
|The bank agreed that there is room for improvement in their disclosures and focus on ESG. They have appointed a team to compile ESG data from bank and publish a report. The bank will reflect the focus on ESG to the management team, with a commitment to increase awareness.|
For further information on: Proxy Voting Policies, Stewardship Policy, Controversial Weapons Policy, Regional Stewardship Code Statements and PRI Transparency Report please visit the Responsible Investing section on www.franklintempleton.co.uk
Franklin Templeton is a signatory of the Stewardship Code and, as required by the Financial Reporting Council (FRC), reported on how they have applied the provisions in their annual Responsible Investment Review in early 2021.