Monday 06/04/2020

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What is the value of sustainability in emerging economies? (I)

Responsible Investment Strategist

Since 2008, Degroof Petercam has been publishing its six-monthly sustainability ranking for the 34 OECD countries. In 2013, the company decided to broaden its expertise to emerging economies and started looking into the sustainability characteristics of 84 so-called emerging economies. Three years later it is time to take stock, and the conclusion is clear: the sustainability analysis of emerging economies is very useful!


An approach adapted to the challenges of emerging economies

In order to address the specific features of emerging economies, the sustainability methodology has of course been adapted to the issues which are inherent to the universe. Although the model is based on the five major sustainability pillars, namely transparency and democratic values (1), population, healthcare and wealth distribution (2), environment (3), education, innovation (4) and economy (5) - the parameters are distinctive and are focused on the major challenges these economies are facing, including access to water, primary education and the respect for political rights and civil liberties.

Moreover, the methodology is reviewed twice per year in a think-tank involving external experts. This ensures that the model is constantly being fine-tuned. In the past three years, the information sources have improved substantially, while the data for a large number of countries has become much more widely available. In addition, the methodology has continued to improve, thanks to additional indicators being added as well as the increased country coverage, which has gone from 84 to 87 emerging economies between 2013 and 2016.

Assessing the dynamics of progress: a key factor for the analysed universe

The latest enhancement of the methodology is related to the weight of the trend indicator in assessing the sustainability performance of countries. The objective of the trend indicator is to assess the dynamics of a country and see to what extent it has made an effort in the various sustainability domains. It is evaluated on the basis of the progress made in the past three years. The latest ranking has seen an increase of the weight of this trend indicator from 25% to 50% today. In other words, it means that the progress made by a country is as important as its absolute position.

Most definitely a relevant analysis!

Although many observers believe that an analysis of the sustainability profile of emerging countries came too soon, the analysis of the performance of the universe clearly demonstrates that such an approach has its merits.

Firstly, by looking into the aspect of transparency and democratic values, the methodology allows to make an initial assessment of the political context of a country and its stability. The quality of its public institutions is evaluated, as well as its transparency or the lack thereof, in terms of corruption and press freedom, for instance. It also involves looking into the fundamental rights of civil society, including political rights and civil liberties. Furthermore, the analysis of the population and its well-being also enables to detect flaws and weaknesses that civil society is confronted with, and which lead to instability, and so which are detrimental to a sound investment climate.

In the light of investments in sovereign debt, performance and risk mitigation are key factors. Moreover, the contribution of the sustainability filter becomes even more important as market volatility increases and these markets’ performance goes down. This demonstrates the strength of the tool in better understanding risks.