Folau, an evangelical Christian, had his Wallabies contract terminated in 2019 after he posted a meme on social media that said "hell" awaits homosexual people and other groups. He then returned to international rugby last year with Tonga.
British media reported that England's Rugby Football Union (RFU) will respond to Folau's selection with a show of support for the LGBTQ community by flying the rainbow flag.
"It's a consequence of Folau's selection and I think it's a good thing. It's an opportunity to show support to that flag. I don't have a problem with it," said Hansen.
"There wouldn't be one there if Israel wasn't playing, so whenever we can bring attention to people who are suffering in a positive way, that's good.
"They deserve to be loved and cared for as much as anybody else. If we all did that, it’d be a happy place, wouldn't it?"
Hansen, who led the All Blacks to the World Cup in 2015, said some people might be hurt by his decision to pick Folau but added that he does not agree with the player's views.
"He's a rugby player first and foremost and he's been sanctioned," he said. "Those sanctions have finished, he's playing rugby, he's probably going to go to the World Cup, so my job is to pick the best team and that's what I’ve done."
