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Nordic countries have done well in Robeco’s first annual fixed income ESG rankings, while Russia is bottom. Raymond Verstraelen, Senior Portfolio Manager in Robeco’s Rates team, assesses the results.
Sweden, Norway and Australia have emerged as the three top countries in the first annual Robeco fixed income ESG country rankings. That means they are the three countries where environmental policy, social policy and the governance environment are most supportive of government bond performance, according to Robeco’s Rates team. The rankings reflect analysis of 41 countries, based on the investable universe in developed and emerging markets.
Northern Europe takes seven out of 10 top places
It is perhaps no surprise that developed nations, especially ones from northern Europe, take the lead in the rankings. Four Nordic countries—Sweden (1st), Norway (2nd), Denmark (6th) and Finland (7th)—are in the top ten, as are a cadre of anglophone countries: Australia (3rd), Canada (5th), the UK (9th) and New Zealand (10th).
Robeco's fixed income ESG country rankings 2012
Source: Robeco / Chart 1
“The top three countries scored very highly in all categories,” observes Raymond Verstraelen. Sweden’s top spot reflects top-three rankings in areas such as political risk and competitiveness. It also took first place in governance. “The country’s public institutions are very efficient and transparent. Innovation-led growth has been a main focus point,” he notes.
Second-placed Norway received the top score on factors that measure education and living standards. “It was also the runner-up on political-risk indicators such as legislative strength and government cohesion,” he explains. Moreover, 35% of Norway’s energy consumption is from renewable sources, mostly hydro. That is the highest percentage in the universe.
Australia was pushed down into third place because of a slightly lower score on environmental data. Even so, Australia scored highly on political risk and social factors. And it actually has an advantage in ageing-related issues, such as a low elderly dependency ratio.
Russia in 41st & last place
At the other end of the table, the bottom three comprises Indonesia, Thailand and Russia. “Russia came in last on our ESG criteria mainly because of its very weak scores in a number of governance-related areas, including political rights, the rule of law, regulatory quality and ageing,” explains Verstraelen.
While the northern Europeans’ high scores and the low ranking of Russia might have been expected, the research has thrown up some unexpected results. Verstraelen picks out the high rankings of Chile (16th) and Singapore (15th) as the most notable positive surprises.
Its 16th place means that Chile, which is categorized as an emerging market, ranks higher than G7 member France (17th). While Chile’s scores on environment and social factors aren’t as high as France’s, it does do better on governance-related issues such as age-related spending and the quality of its regulatory environment.
Italy cannot match Chile on ESG
Verstraelen feels that the low rankings achieved by Italy (22nd) and Portugal (27th), both of which were founding members of the eurozone, are also unexpected, especially given that they trail some emerging markets. “The eurozone is highly developed, so you would expect certain standards there,” he says.
In both countries, political stability, government effectiveness and rule of law are all below average. “These are important issues at a time when significant structural reforms have to be designed and implemented,” he observes.
ESG factors are central to investment decision-making
As fascinating as these rankings may be in themselves, ultimately they are valuable only when they are captured by the fixed income investment decision-making process. How is that done?
These country rankings are used by Robeco’s Rates team as a starting point for a more in-depth discussion on ESG factors. The ESG analyses—which the team started in 2008—are now an integral part of the fixed income country allocation framework, together with debt sustainability and macroeconomic analysis.
“The rankings are not intended to exclude countries from investable universes,” explains Verstraelen. “Instead, the focus is on what we view as important drivers for bond markets.” The ESG analysis thus gives more weight to social and governance factors—including political stability, the rule of law, social cohesion and the costs of ageing—than to environmental ones.
ESG continues where other research stops
Verstraelen believes that these factors contribute significantly to both decision making and performance. That is because it allows a deeper understanding of sovereign-debt dynamics that are not captured by these other types of research. “ESG continues where traditional fundamental research stops,” he observes. “It gives valuable additional information about how a country is run. This helps us to identify risks that are not properly priced in the markets.”