InsightsCountryRisk.io: Framework for Assessing ESG Policy Commitments and Implementation
CountryRisk.io: Framework for Assessing ESG Policy Commitments and Implementation
Bernhard Obenhuber Oct 02, 2019
Climate change, global migration flows or the consequences of digitalisation on labour markets and global supply chains have profound impacts on our society and the future prospects of every country. With the United Nations Sustainable Development Goals (UN SDGs) that take a broad perspective as well as the Paris Agreement on Climate Change, a set of ambitious goals and targets exist that address the challenges of our times.
UN SDG: Track a country’s progress
In order to reach these targets and challenges, the UN SDGs proposed a list of nearly 170 individual objectives and specific indicators to measure progress towards the achievement of each goal. One example is to “eradicate extreme poverty for all people everywhere” by 2030. While data availability remains patchy for many aspects, the UN SDGs nonetheless allow a comprehensive tracking of a country’s progress towards achieving the SDGs. They also allow for cross-country comparisons and the identification of weaknesses on a national and global level. The Sustainable Development Report prepared by the Sustainable Solutions Network (SDSN) does an excellent job in keeping track of the UN SDGs and holds a mirror up to the public and policy makers. In the latest 2019 report, the authors write:
“Once again, Nordic countries — Denmark, Sweden and Finland — top the SDG Index. Yet, even these countries face major challenges in implementing one or several SDGs. No country is on track for achieving all 17 goals with major performance gaps even in the top countries […].”
ESG risk factors for country risk assessments
At CountryRisk.io, ESG/SDG risk factors have been integrated into our country and sovereign risk framework for some time. You can read more about it here. Integrating ESG risk factors into a sovereign risk assessment framework can lead to a different outcome and a better differentiation across countries than not accounting for them explicitly.
We have selected a subset of the SDG indicators, which we think have the most impact on a country’s willingness and ability to repay government debt obligations. For example, higher exposure to natural disasters (e.g. flooding, drought) can have a material impact on the existing capital stock, or give rise to more erratic business cycles or shocks to fiscal position. Similarly, poor education or social security systems would weigh heavily on and undermine productivity in the long-term.
More is needed to reach the SDGs by 2030
Economic or social indicators tend to measure past performance, and are by and large a reflection of past policy decisions, or lack of thereof. Given the slow changing nature of many SDG indicators (e.g. proficiency in reading), one might dare to extrapolate from past performance to glean whether the target goals are achievable by 2030. And in so doing, one may conclude that most countries will not meet many essential targets.
Clearly, this is not sufficient. Within the context of a comprehensive ESG/SDG country risk assessment, current government policies, the general public’s sentiment and policy proposals — if they so exist — need to be explicitly incorporated in the analysis.
The following sections of this paper describe our analytical approach at CountryRisk.io in studying these challenges and share some specific country examples.
Policy assessment dimensions
1. Awareness of ESG topics of policy makers. This dimension assesses whether ESG factors are relevant for governments when designing national policies, as they reveal authorities’ regard toward global treaties for climate change, child labour or migration, and other factors.
In Brazil for example, President Jair Bolsonaro has demonstrated that SDG/ESG goals are of little relevance despite the awareness over the consequences of climate change in Brazil and its citizens. President Bolsonaro took the presidential office in Brazil in part thanks to his position in favour of deregulating the economic exploitation of the Amazon, as part of a broader political narrative that denies global climate change. This has triggered an unprecedented burning of rainforest in the region, which is “the world’s largest forest and repository of carbon dioxide”. These uncontrolled fires are not only having a direct impact on Brazil’s society but are also creating regional and global consequences. As the UN research group on climate change, The Intergovernmental Panel on Climate Change (IPCC), has highlighted, Amazon rainforest arekeyto reduce climate change effects on a global scale.
2. Capacity & resources:This dimension evaluates whether the country possesses the financial capacity and financial and technical resources to devise and implement sustainable policies for all Sustainable Development Goals. The financial capacity is related to countries’ financial wealth, fiscal position and overall size of the general government’s resources through taxation and other sources of revenue. Technical resources relate to the availability of universities, think-tanks and access to international organisations for devising national sustainable development policies.
China’s economic ascent in recent decades has given policy makers the financial resources to tackle major environment issues (e.g. pollution in large cities due to outdated coal-fired power plants) that affect its society and economy. Since 2016, China has endorsed the 2030 UN Agenda for Sustainable Development. China’s high levels of financial capacity and willingness to apply ESG goals to its policies ranks it favourably atop its global peers. That being said, progress has been uneven: while China appears strongly committed in some areas (e.g.: green energytransition), it neglects the importance in other areas (e.g.transparencyreforms andanti-corruption legislation), which hold it back in return from reaping the benefits of its financial gains.
3. National policy alignment:Although a country and its policy makers may be aware of the importance of sustainable development and has the capacity to act, policy makers might act differently and devise measures that are not aligned with the six transformations and UN SDGs. The influence of strong interest groups in a country can lead to a watering down or stalling of sustainable policies (e.g., car industry opposing legislation that promotes e-mobility or stricter emission standards).
Taking Turkey as an example, climate change is directly affecting one of its most important economic sectors: agriculture. A decrease in precipitation and an increase in temperatures have had dire consequences to land productivity and water resources. Despite recognising this critical environment situation, Turkey’s political elite does not appear to be prioritising climate change or other ESG goals. Although part of these goals were considered by the10th Development Planof the Ministry of Development, where it also mentioned the government’s intent to fight climate change, several indicators point to another direction. A recentsurveyin Turkey has shown that as much as 55% of broader society believes that government institutions are not taking any action to fight climate change or protect its natural environment. Consequently, Turkey’s alignment with UN SDG coals would rank low.
4. Enforcement:Finally, enforcement of sustainable policies is also key. In many cases, new policies have either very long grandfathering periods, have limited penalties attached or lack adequate resources to support and enforce legislation. Without proper implementation and enforcement, reaching the SDGs will not be possible.
Saudi Arabia is a good case to understand this last variable. Although this Middle East Kingdom has publicly endorsed the UN 2030 Agenda in different government reports (Vision 2030), the institutional characteristics of this state makes the full application of SDG goals challenging. Right after the presentation of the UN 2030 Agenda in 2015, Saudi Foreign Minister, Adel Al-Jubeir, that “mentioning sex in the text, to us, means exactly male and female. Mentioning family means consisting of a married man and woman”. The immediate remark demonstrated Saudi’s limitations to fully implement the 17 goals of the 2030 Agenda and runs against the UN SDG goal number 5, which calls for an end to all sexual discrimination and violence against woman and girls, including as well lesbians, transgender and bisexuals. In Saudi Arabia, homosexuality is punishable by death and Saudi authorities systematically repress LGBT political demonstrations and acts.
Holistic approach to assess ESG country risks
Our ranking of countries take into account the current stage of SDG achievements, and we complement this with an outlook of whether government policies are supportive of, or are detrimental to, the future convergence towards reaching the SDGs.
It is important to note that the methodology completes the important political risk assessment in a more general sense such as the quality of government institutions in relation to democratic values, rule of law (separation of powers), media independence from political power, corruption and transparency levels, and conflict status (state of international or external conflicts of a given country and the threat of terrorism).
We would love to hear from you what you think about this approach and ideas for improvements or interests to cover a specific country.