New Maplecroft ESG tool calculates country level sustainability risks – BRICs pose significant social and governance challenges in respect of the long-term economic growth environment
ESG best and worst performers (available to trial users and subscribers)
A new country-level ESG evaluation tool, providing instant analysis for investors, has exposed significant social and governance challenges in the BRICs and emerging economies, while identifying Somalia, North Korea, Myanmar and DR Congo as posing the most environmental, social and governance risk.
Maplecroft’s ESG Atlas and Risk Calculator has been developed to allow investors to undertake their own evaluation of country-level ESG risks to suit respective risk appetites, investment screening and other criteria. It allows users to choose across ESG issues from 49 risk indices to create country scorecards and a bespoke global ESG dashboard.
A central feature of the tool is that, in addition to Maplecroft’s own ESG risk calculations, it also enables investors and sustainability professionals to apply their own weightings to risk indices according to investment or stakeholder priorities. This approach allows users to monitor exposures and opportunities throughout investment portfolios or global supply chains.
According to Maplecroft’s results, the 10 countries with the highest levels of ESG risk are Somalia, North Korea, Myanmar, DR Congo, which are classified as ‘extreme risk’ in the overall results, while Zimbabwe, Afghanistan, Sudan, Chad, Iraq and Pakistan sit within the ‘high risk’ category. However, all are categorised at ‘extreme risk’ in the social category, with nine posing ‘extreme’ governance risks, excluding Pakistan.
“Understanding the ESG landscape is a priority for all investors, as well as multinational companies,” states Mike Davies, Associate Director at Maplecroft. “By using rigorous country level ESG assessments, organisations can help to ensure their investments do not compromise human rights, lead to the loss of biodiversity or negatively impact on ecosystem services, but rather contribute to address poverty and improve social welfare. As a result, investors can safeguard against complicity in ESG-related risk.”
The ESG Atlas and Risk Calculator’s top-level results reveal that the growth economies of China and India are among the 38 countries classified as ‘extreme risk’ in one or more ESG categories. Both are ‘extreme risk’ across social issues, with China featuring as ‘extreme risk’ in 12 out of 14 labour rights and human rights categories. China is also among the lowest performers for democratic governance and has one of the least independent legal systems. India’s risk is not confined to social issues. It features in the 10 poorest performing economies for environmental risk, driven by its status as one of the world’s highest GHG emitters, as well as its extreme vulnerability to climate change impacts and significant threats to its biodiversity.
Russia, on the other hand, poses ‘extreme’ governance risks, such as a poor rule of law, systemic corruption and a lack of judicial independence. Other emerging economies categorised as ‘extreme risk’ for governance, and therefore that are challenging for investors, include Iran, Cote d’Ivoire and Nigeria, while Pakistan, Bangladesh and Nigeria, are considered as “extreme risk” for societal issues.
“This is not to suggest responsible investment is not needed in ‘high’ and ‘extreme risk’ economies, but rather that all investors will need to assess and monitor the evolving situation to ensure investments achieve their intended impact,” says Professor Alyson Warhurst, CEO of Maplecroft. “The ESG Atlas and Risk Calculator will be a useful tool for engagement”.
The behaviour of companies is coming under increasing scrutiny with growing societal pressure for ethical and responsible business practices. National initiatives, such as the UK Stewardship Code and new pension fund regulations in South Africa, which require ESG factors to be given appropriate consideration, are raising the profile of ESG issues. These factors are increasingly seen to be material to companies in financial, operational and reputational terms. For example, companies can experience financial loss through fines stemming from reasons as diverse as poor water management and pollution, operational shut-downs from labour disputes, or reputational damage arising from complicity in corruption or child labour.
This is particularly relevant to the emerging economies, which have seen increasing investment over recent years – over $1000 billion per annum. In these markets, poor governance and regulatory regimes that are often unsupported by rule of law, mean that investments carry greater risk of having negative environmental or social impacts. Responsible investments and operations in high risk environments can however support local environments and communities by providing benchmarks for best practice.
Of the other important emerging economies, South Africa’s strong corporate governance framework means that it performs better than Brazil, despite a worse score in the environmental category. South Korea is the best performing country out the BRICs and N11, scoring higher than both Greece and Italy. Scorecards for Greece and Italy show relatively poor performance in terms of Corporate Governance and Strength of Auditing and Reporting Standards.
Maplecroft’s analysis also reveals that repressive and failed states have the poorest ESG performance. These are Somalia, North Korea, Myanmar and DR Congo, which are the only countries to be considered as having ‘extreme’ overall ESG risk, while Afghanistan, Zimbabwe, Sudan, Iraq, Chad and Pakistan present ‘high’ overall ESG risk. The risk categories help screen or flag investments where additional engagement would be required to ensure sustainable or responsible outcomes in the long term given their likely effect on the environment or their wider societal impacts.
Western European economies outperform their peers on all categories. Unlike the worst performers, which are geographically diverse, 9 out of 10 of the best performers are located in Europe. Of the total of 22 countries in the ‘low risk’ category, New Zealand, Australia and Canada are the only countries located outside of Europe. The best performing countries include those in Scandinavia: Norway, Sweden, Denmark and Finland.
“By providing a more comprehensive view of the ESG environment, country-level analysis, supported by the Maplecroft ESG Atlas and Risk Calculator, can help business and investors to understand the risks they need to manage in order to flourish in the fastest growing emerging economies,” said Jim O’Neill, Chairman of Goldman Sachs Asset Management and a Maplecroft investor. “Insights such as these help us understand the future economic growth environment.”
As with all its products and tools, Maplecroft’s ESG Atlas and Risk Calculator provides users with transparent access to methodology and sub indices. It builds on Maplecroft’s Global Risks Portfolio, which is home to over 600 risk indices and indicators, 100+ interactive maps, country scorecards, briefings and in-depth reports. The ESG Atlas and Risk Calculator is regularly updated and provides a platform for bespoke applications with sector screens and daily, weekly, monthly or quarterly update options.
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