Human rights complicity is principal ESG investment risk in the BRICs – Maplecroft ESG Risk Atlas and Calculator
Europe is world’s ethical safe haven with 19 of 22 'low risk' countries
Complicity in the violation of human rights constitute the most significant environmental, social and governance (ESG) risk faced by investors in the fast growing BRIC economies of Brazil, Russia, India and China, according to the 2012 findings of the ESG Atlas and Risk Calculator released by Maplecroft today.
The ESG Atlas and Risk Calculator includes 49 ESG risk indices, evaluating 197 countries, which investors can choose from 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 Sovereign Risk Rating, it also enables users to apply their own weightings to risk indices to suit individual risk criteria.
According to Maplecroft’s results, the 10 countries with the highest levels of ESG risk are Somalia, North Korea and Myanmar, which are classified as ‘extreme risk,’ while South Sudan, Haiti, DR Congo, Sudan, Zimbabwe, Afghanistan and Pakistan sit within the ‘high risk’ category.
However, global investment is centred in the new financial powerhouses of the BRICs, along with other emerging growth markets, such as Indonesia, Mexico, Nigeria, the Philippines and Viet Nam, and it is in these countries where responsible investors will be particularly exposed to ESG risks.
All of the BRICs are classified as posing high ESG risks in Maplecroft’s overall results, with the exception of Brazil, which is categorised as ‘medium risk.’ It is within the area of human rights though that investors face the biggest challenges, Maplecroft’s findings reveal.
Within the 14 human rights categories assessed by the ESG Atlas and Risk Calculator, Brazil performs the best of the BRICs, but is still classified as ‘extreme risk’ in five categories: child labour, working conditions, minority rights, indigenous peoples’ rights and security forces. Brazil also exhibits high levels of environmental risk and it is among the world’s worst performers for threats to biodiversity, deforestation and GHG emissions.
Russia is classified as ‘extreme risk’ in nine of the 14 human rights categories, but it is China and India which pose the most risk to investors in this regard. Both feature in the ‘extreme risk’ category of 12 of the human rights indices, including six of the seven labour rights risks.
“This is not to suggest responsible investment is not needed in the BRICs, but rather that all investors will need to assess and monitor the human rights situation to ensure investments achieve their intended impact and that there is no risk of complicity ,” says Professor Alyson Warhurst, CEO of Maplecroft.
ESG risks in these countries are not confined to social issues though. China is also among the lowest performers for democratic governance and, along with Russia, has one of the least independent legal systems, while India is the 12th poorest performing economy for environmental risk.
According to Maplecroft, ESG factors are increasingly seen to be material to companies in financial, operational and reputational terms. 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. 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,” adds Warhurst.
A lack of political freedoms, combined with development gains, have been shown by Maplecroft research to be a major destabilising factor in forced regime change, such as that seen during Arab Spring. The MENA countries also score poorly in Maplecroft’s ESG Sovereign Risk Rating.
Of the total of 22 countries in the ‘low risk’ category of the ESG Atlas and Risk Calculator results, 19 are located in Europe signalling that the region remains an ethical safe haven for responsible investors due to established legal and regulatory systems and good governance. The best performing countries include: Norway, Sweden, Denmark, Finland, Switzerland, Germany and Austria. New Zealand, Australia and Canada are the only countries located outside of Europe classified as ‘low risk.’
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