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Franklin Mutual Global Discovery C TEDSX Sustainability

| Analyst rating as of

Sustainability Analysis

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Sustainable Summary

Franklin Mutual Global Discovery Fund may not appeal to sustainability-conscious investors.

This fund has the second-lowest Morningstar Sustainability Rating of 2 globes, indicating it holds securities with relatively high ESG risk compared to that of its peers in the Global Equity Large Cap category. Investors concerned about ESG risk may be better off with funds in the category that receive 4 or 5 globes as they tend to hold securities less exposed to ESG risk. ESG risk provides investors with a signal that reflects to what degree their investments are exposed to risks related to material ESG issues, such as climate change and inequalities, that are not sufficiently managed. ESG risk differs from impact, which is about seeking positive environmental and social outcomes.

One potential issue for a sustainability-focused investor is that Franklin Mutual Global Discovery Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. The fund exhibits relatively high exposure (11.52%) to companies with high or severe controversies. Companies with high or severe controversies may be involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company.

The fund has an asset-weighted Carbon Risk Score of 9.35, indicating that its current equity and/or bond holdings have low exposure to carbon-related risks. These are risks associated with the transition to a low-carbon economy such as increased regulation, changing consumer preferences, technological advancements, and stranded assets. Currently, the fund has 8.61% involvement in fossil fuels, which compares favorably with 16.03% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.

ESG Commitment Level Asset Manager

 | Low

Franklin Templeton is forming new high-level plans to address environmental, social, and governance issues. The firm earns a Morningstar ESG Commitment Level of Low.

Franklin formally started its sustainable investing journey in 2013 when it signed the UN Principles for Responsible Investment and Julie Moret became the head of the centralized ESG team, which would eventually count a few dedicated analysts. That said, the firm has recently made some changes and appears to be forging its overall ESG philosophy against the backdrop of its 2020 acquisition of Legg Mason, which included several autonomous investment boutiques. The firm created a new stewardship and sustainability council in mid-March 2021 that will set a common research agenda in addition to tackling data requirements, transparency, and reporting for the firm’s 19 distinct investment teams.

David Sheasby, head of stewardship and ESG at affiliate Martin Currie since 2015, and David Zahn, head of European fixed income within Franklin Templeton's fixed-income group, are leading the council. They plan to add one member to the council from each of the affiliates; replace Moret, who recently departed; and add another dedicated ESG analyst to this small, dedicated team. In the near term, the council is focusing on amalgamating ESG information and making it more easily available to the teams. The dedicated ESG team will continue its mission to help each affiliate build out custom ESG models and frameworks, though portfolio managers are free to use this information as they see fit and there is no formal system for reporting how they use the data to the ESG team.

Franklin has mostly used a light touch when it comes to ESG and engagement issues, though the council may work toward more central guidance and tracking on engagement and proxy voting. While some investment boutiques, including Martin Currie, are further along in integrating ESG into their investment processes, Franklin overall remains in the early stages relative to competitors.