ESG Portfolios - Invest with Purpose and Geopolitical Impact Assessment
ESG has become a key component globally in helping the financial sector manage risk and allow more value-based investment with 76% of managers implementing ESG in their fixed income investments according to Reuters mentions,
The measurement of geopolitical impact in an ESG context becomes intricate when different countries hold divergent views on what constitutes 'friendly', requiring tailored analysis for emerging market (EM) sovereign bonds portfolios. By measuring geopolitical impact, investors can better comprehend the potential challenges and advantages associated with different regions.
The absence of harmonization across diverse taxonomies presents a complex puzzle for investors, particularly those managing portfolios across multiple jurisdictions. By understanding the real-world effects of investments, investors can make informed decisions aligned with their ethical, environmental, and social objectives. Impact measurement serves as a bridge, connecting the diverse intentions of investors with the actual results, allowing for more transparent and accountable investment practices.
Winning the 2022 Infrastructure Fund of the Year, Maple-Brown Abbott Global has ESG at the forefront when they make investment decision-making. Emma Pringle, Head of ESG at Maple-Brown Abbot delves into how a portfolio can be impacted by the geopolitical environment and the various metrics on how to evaluate a profile. Read on to find out how to evaluate a country's progress towards achieving the United Nations' SDGs.
1. How can you measure the impact in your portfolio if there is not yet an agreement in the taxonomies ?
The lack of harmonisation across the growing number of regional taxonomies is certainly a challenge for investors – especially those holding portfolios that span numerous jurisdictions. That said, measurement of impact is very much tied to the impact goals that an investment is looking to achieve. Keeping this in mind, tying the impact measurement to the intentionality of any capital allocation makes it simpler to measure the outcomes. For example, if a portfolio is looking to support the energy transition, looking at the ‘real economy’ outcome of invested capital – such as reduction in GHG emissions of the portfolio – is a useful, and easily communicable approach. Depending on the intentionality of the impact, other considerations may be to look at the percentage of issuers’ revenue alignment to relevant Sustainable Development Goals (SDGs), or identify relevant social metrics such as percentage of women in the workforce.
2. For ESG'G', how would you measure a geopolitical impact on a portfolio when different countries have a different view on what is 'friendly' geopolitically?
Like all ESG analysis, relevant factors to consider - and the resultant metrics - may vary across different EM sovereigns. As such, analysis of EM sovereign bonds portfolios need to be tailored to the specific characteristics and challenges of each country – including, for example, geopolitical developments and emerging social or environmental risks. ESG metrics to be considered for an EM sovereign bonds portfolio include:
Environmental Metrics:
GHG and decarbonisation: Assess the carbon intensity of the countries in the portfolio. Look at their efforts to reduce greenhouse gas emissions and transition to cleaner energy sources.
Renewable Energy: Evaluate the percentage of energy derived from renewable sources and the country's commitment to increasing renewable energy capacity.
Natural Resource Management: Consider how well the country manages its natural resources, including forests, water, and biodiversity.
Climate Risk and Adaptation: Assess the country's vulnerability to climate change and its efforts in climate adaptation. Consider the existence of policies and strategies to mitigate climate-related risks.
Social Metrics:
Social Inequality: Evaluate income distribution and wealth inequality within the country. Look at social programs and policies aimed at reducing poverty and promoting social equity.
Health and Education: Assess the quality of healthcare and education systems. Health indicators such as life expectancy and education enrolment rates can provide insights into social development.
Labor Standards: Examine labour practices, workers' rights, and the existence of fair labour laws. Consider the prevalence of child labour and adherence to international labour standards.
Human Rights: Consider the country's record on human rights, including civil liberties, freedom of expression, and protection against discrimination. Governance Metrics:
Political Stability: Evaluate the overall political stability of the country. Consider factors such as the rule of law, political institutions, and the effectiveness of governance structures.
Corruption: Assess the level of corruption within the government and public institutions. Transparency International's Corruption Perceptions Index can be a useful resource for this.
Regulatory Environment: Consider the effectiveness and transparency of regulatory frameworks. Look at the legal system and the protection of property rights. Sustainable Development Goals (SDGs):
Evaluate the country's progress towards achieving the United Nations' SDGs.
These goals cover a wide range of issues, including poverty, hunger, health, education, gender equality, clean water, and responsible consumption.
Emma Pringle
Head of ESG
Maple-Brown Abbott