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Recently, the semi-annual update of the RobecoSAM Country Sustainability Ranking was released. It shows some notable shifts in Europe.
Many countries’ sustainability performance is under continued strain due to persisting social tensions and heightened political risks. The latter have also been highlighted as the biggest threat to the global economy in the IMF’s latest World Economic Outlook. As we already suspected in the April 2016 update, such an environment has, of course, not remained without ramifications for country risks in a broader sense.
The Figure below shows the latest Country Sustainability Ranking. The new ranking puts Norway at the top, with Sweden and Finland completing the podium and Switzerland running a close fourth.
Figure 1 | Country Sustainability Ranking October 2016
Not surprisingly, the United Kingdom had a major shift in rank and was relegated from 4th place to 12th. The Brexit vote has left a highly divided country and could well lead to political and social tensions. However, the real effects of Brexit will only be seen once the nature of the new relationships with the EU are known. The UK will most likely be forced to adapt its growth model, but can at least count on a robust and balanced sustainability profile that should facilitate this task. Its governance performance surpasses many of its European counterparts. On the other hand, income inequality is relatively high and may have contributed to widespread frustration and the success of the Brexit campaign.
Ireland’s ESG performance is still above average, even though it had to cede its top position within the EMU peer ranking, with a drop to position 4. Reason is the inclusion of new data on pension assets, which improves the score on aging for countries such as Finland and the Netherlands. Still, the score remains strong at 7.2, which is a full point better than for instance Spain.
The score is weaker on energy dependence, but the country benefits from a robust governance framework and enjoys a favorable political and social climate, which is reflected in leading positions on political risk, social stability, corruption and social progress. Ireland also enjoys a well-developed welfare system that has not only helped to maintain social cohesion, but also its readiness to accept painful and needed structural reforms. This, in turn, has contributed to Ireland’s remarkable recovery from the financial crisis and its status as the euro area’s growth leader during recent years.
Figure 2 | ESG scores for EMU countries
Within the euro periphery we continue to prefer Ireland from an ESG perspective. In funds such as Robeco Euro Government Bonds we have recently increased investments in Irish government bonds after a spread widening.
As for the southern European peripherals, both Greece and Italy rank within the bottom 10% of high-income, advanced economies. The Iberian Peninsula had a similar performance. These countries are still struggling in the aftermath of the financial crisis. Greece and Italy have suffered from declines in their political risk and political stability scores since the last update in spring this year.
Italy is one of the three EMU countries which score below 6 - the others are Slovak Republic and Greece. In funds such as Robeco Euro Government Bonds and Robeco Global Total Return Bond Fund we have been reducing holdings in Italian bonds since March this year.
In Greece, the social cost of the crisis has been severe and the country’s social unrest indicator has deteriorated continuously over recent years. Political prospects look a bit brighter in Spain, which finally has a new government after nearly a year of political limbo. However, political uncertainty will not disappear, as Rajoy will face a multitude of challenges and will need to find the right balance when dealing with the diverse expectations and demands of Spanish voters, the European Union, and the separatists’ Catalonian regional government.
Turkey has fallen to rank 55, from a previous #50. The after-effects of the failed coup in July are aggravating an already delicate political situation. President Erdogan has responded to the failed coup by intensifying his long-running purges of the army, education system, judiciary, media, police force and state administration. The AKP (Justice and Development Party) has renewed its push for a presidential system that would involve a transfer from executive powers to the president. President Erdogan has also confirmed that he will ask the parliament to consider reintroducing the death penalty as punishment for the plotters behind the failed coup.
The continued decline in the ESG profile of Turkey is an important worry when considering investing in Turkish government bonds and the Turkish lira. We are particularly worried by the decline in the human rights score and by the potential for political and social unrest mentioned above. In our Emerging Debt strategy we have reduced investments in the Turkish lira since September.
As we already highlighted in the last update in April 2016, political risks around the globe have continued to increase. The US presidential elections outcome, Britain’s exit from the European Union, the refugee crisis in Europe, political discord and geopolitical tensions in a number of countries all represent potential shocks that have been present for quite some time and have become even more pronounced in recent months.
Persistently sluggish recovery, widespread public discontent with economic policies and ‘the establishment’ in advanced economies are giving rise to anti-trade sentiment, protectionist policies and populist tendencies. From this point of view, the surprising outcome of the US presidential elections is just the latest step in a longstanding global trend of increasing political uncertainty and growing populism.