Candriam have published its Sovereign Sustainability Report for 2022.
Key findings include:
• A major takeaway is that some of Asia’s largest countries, together covering a population of over 3 billion people, are heading in the wrong direction from a sustainable investment perspective.
• Candriam’s proprietary model assesses a country’s relative suitability for sustainable investment, ranking the performance of 123 countries in the world across four core pillars of sustainable capital: Natural, Human, Economic and Social*. All the model’s outputs are mappable to the 17 UN Sustainable Development Goals.
• Against all the four pillars, many of Asia’s biggest nations – most notably China, India, Indonesia and Malaysia – are facing material downward pressure in the model’s country rankings, giving them a less attractive outlook for sustainable investment.
For example:
o Human Capital – India and Pakistan are outside the top 100 countries for food security, with Indonesia not far above that in 94th place. Extreme weather has already threatened rice crops in several countries, including the world’s biggest rice exporter, India.
o Natural Capital – Asia is one of the lowest scorers within the natural habitat and biodiversity component of this pillar, with China, Malaysia and Indonesia being ranked outside the top 100 countries. A rise in surface temperatures is accelerating across the region.
o Social Capital – Among the countries demonstrating the most improvement in democratic accountability are those that aspire to join the EU, such as Moldova. The worst trend was observed in Hong Kong, with Beijing’s efforts to crush the democratic system there well-documented.
o Economic Capital – With monitoring the global energy transition at the cornerstone for assessing the economic capital of a country, its future competitiveness in global markets, and the gradual decarbonisation of its economy, Asia continues to score badly. The region remains the world’s biggest user of coal, which sits at the heart of its poor scoring.
• The report also argues that investing in autocratic countries is not profitable over the long-term. So, while investors have continued to pour their money in the sovereign debt of autocracies attracted by short-term gains, Candriam’s analysis shows that this is not generating alpha in the long run and from a fiduciary point of view, should be avoided.
• Indeed, under Candriam’s framework autocratic regimes are not eligible for sustainable investment. Historically, democracy and respect for human rights have had a positive impact on countries’ economic performance, and hence their ability to repay their debt.
o Looking at data since 2006, “Free Countries” outperformed the equally weighted JP Morgan Emerging Markets Bond Index Global Diversified™ index (EMBIGD) by 0.51% a year in the past 16 years, “Partly Free” countries underperformed by 0.15% and “Not Free” underperformed by 0.47% during the same timeframe.
• Now in its third year, the model has proved a reliable early warning signal for Candriam’s sustainable funds. Most notably, excluding Russia from the firm’s sustainable investment universe long before Putin’s war on Ukraine, meant the firm’s sustainable strategies have not been allowed to hold Russian sovereign debt.