Stockholm (NordSIP) – While ESG scores often focus on companies, efforts have been made to apply these methodologies to governments and countries. ISS, Refinitiv, Sustainalytics, MSCI, Fitch and even the PRI have made contributions to this quest.
However, data providers are not the only game in town. Franklin Templeton’s contribution dates back to 2018 when it launched its own ESG scores in sovereign fixed income investing. In total, the asset manager provides ESG scores for over 150 countries, although “only 100 of the more than 150 are actively covered using customized overlays that reflect the analytical views of our research team.”
In its latest update on the matter, Templeton Global Macro (TGM) took the time to shed some light on the effects of the Russian invasion of the Ukraine. The results might appear surprising.
Russia is Bad but Score Improves
“In February 2022, Russia launched a full-scale attack and invasion of neighboring Ukraine. The implications of the war in the geopolitical, moral and human suffering sense are beyond the scope of this publication. (…) Given the importance of what is happening and the large amount of attention that has been placed on the conflict in recent weeks, we believe it warrants a deeper dive in this update,” the report argues. Discussing the role of corruption in eroding Russia’s institutions TGM notes that there “has been a political structure that is more subject to one man’s whims and paranoias, rather than an independent body that pursues policies in benefit of its people,” the report continues.
“We believe this war will bring governance back into focus,” TGM adds before adding that “declining institutional quality has spread into corruption, policy mix and social cohesion” in Russia. This general analysis of the state of affairs in Russia caused TGM “to assign a 2 point overall lower ESG score to Russia than the benchmark would have indicated.”
However, despite TGM’s discussion of Russia’s ESG decline, the company scores Russia’s ESG index at 47, up from 46 in the previous analysis. The causes of this improvement are not immediately clear. The report mentions changes to how the indexes are calculated, which now includes measures of business climate and demographics as well as food security and human capital. That being said, we are left wondering how the inclusion of these measures would benefit a country that is facing heavy international trade sanctions and projected to experience a significant population decline in the next 75 years, while it is conscripting young men to fight in a war.
Discussing Ukraine, TGM argues that “the implications of this war remain highly uncertain,” noting that the large population displacements, the unknown future duration of the war and the unknown nature of the country’s government complicates its evaluation. TGM’s ESG score for the Ukraine is 44, up from 43 in the previous analysis.
Although Russia scores higher than the Ukraine on the environmental and social categories, both countries score the same on governance matters.
Nordic countries continue to be ESG sweethearts. According to the TGM ESG Scores, Sweden, New Zealand, Denmark, Norway, Finland and Iceland are the top 6 countries. Angola, Pakistan, Bangladesh, Nigeria and Venezuela rank at the bottom.
In terms of changes from the previous analysis, six months ago, Taiwan, New Zealand and Ireland show “significant improvement”, while Serbia, Kazakhstan and Belarus show “significant deterioration”. TGM projects that the score of 20 sovereigns will improve, most of all those of Brazil, Vietnam, Gambia, Italy and Serbia. There are also 19 countries with negative momentum in the current update, worse of of all Mexico, Venezuela, El Salvador, Hong Kong and Singapore.
The report concludes with a series of case studies covering ESG factors in Mexico, Ecuador, India, the United Kingdom and Zambia.