NZ was rated the best-performing country in a new global sustainability model released today by the BNY Mellon funds management arm, Insight Investments.
The Insight Investment research dissects the risks for sovereign debt investors in186 countries based on a broad variety of environmental, social and governance (ESG) factors.
“New Zealand boasts robust institutions and governance, stable social relations with a broad acknowledgement of human rights based on the rule of law, and limited exposure to environmental risks,” the study says.
Aside from NZ, the top 10 ESG countries in the Insight list include all the Scandinavian countries, Iceland, Ireland, Latvia, Spain and Portugal.
As the worst performer, Afghanistan has suffered after many years of conflict. Politically and socially unstable, little data is available on environmental factors.
The model assesses not only the current state of all ESG factors, it also estimates momentum, either negative or positive.
Bruce Murphy, Insight Investment’s managing director for Australia and New Zealand, said: “We believe investing effectively in sovereign debt requires in-depth analysis of environmental, social and governance (ESG) matters, especially in emerging markets. However, most ESG analysis and research focuses on corporates – not countries. We have therefore built a proprietary model to help us better understand the ESG risks at the country level across our portfolios.”
ESG factors have been understood as potentially material for sovereigns, but systematic processes and research methods to build these factors into credit ratings and evaluations have only been established relatively recently.
Murphy said: “Insight’s proprietary ratings and momentum scores complement our existing tools for evaluating sovereign and sovereign-related debt. Insight has shown that building a country sustainability risk model not only is possible and credible but can complement and reinforce traditional evaluations of sovereign issuers.
“The model results are in many ways unsurprising: for example, better-governed countries exhibit stronger economic and credit performance. The relationship between the model’s ESG results and economic or credit indicators are more clearly visible in emerging markets where these factors tend to be more material.
“Developed markets, according to the model, are less materially impacted by ESG issues on a systemic basis. However, the momentum scores often align with our portfolio managers’ views on the direction of individual countries.”
Initial observations include:
- Countries with higher GDP per capita typically have better ESG scores. This is generally driven by governance and social factors, not environmental scores
- More countries are deteriorating on ESG than improving – with the majority of developed markets receiving a negative ESG momentum score, and
- ESG momentum has a weak relationship overall with standard industry measures of sovereign credit risk, but there are outliers.
Australia, which fell down on environmental factors, is used as a case study in Insight report titled ‘Sovereigns And Sustainability’.
Apart from environmental issues, the political instability – with six prime ministers in 10 years – also held back Australia’s overall ESG score for bonds.
“Australia has experienced a long period of political change. The country’s 2007 election led to the defeat of Prime Minister John Howard, who had been in power for over a decade. Since then, the country has been led by six prime ministers. This political instability has meant there is little direction on some fundamental environmental and social issues facing the country, with the influence of independent and minority-interest politicians limiting progress in political discourse,” the report says.
“In short, policymaking has become less effective. For example, in recent years, access to housing has become more limited, but the political sensitivities around the issue have led politicians to avoid discussing potential solutions.”
Insight’s country sustainability risk model shows that while Australia’s governance score remains among the highest in the world, it has notable negative momentum, which reflects the challenging political environment.
“It also aligns with our view that the country is likely to underperform on ESG performance at least in the near term, as government policymaking is unlikely to be effective; social issues – such as underemployment and deteriorating social cohesion – are likely to have a negative impact; and the lack of enthusiasm for environmental regulations suggests little will happen to support an improvement in environmental risks. We do not currently expect economic indicators or the markets to reflect Australia’s ESG performance,” the report says.
Insight Investments has about US$780 billion (A$1.075 trillion) under management across a range of equity, fixed income and multi-asset strategies globally. Its parent, BNY Mellon, has about $US1.8 trillion under management.
Greg Bright is publisher of Investor Strategy News (Australia)