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European nations sweep new ESG scorecard, but New Zealand top

Insight Investment unveils in-house sovereign ratings but data needs tweaking on environmental and social factors

Nordic nations have polled strongly in a new environmental, social and governance ratings model for sovereign issuers launched by Insight Investment.

Iceland, Sweden, Finland, Denmark and Norway all made the top 10 sovereign issuers on ESG factors, among a clutch of other European nations. However, New Zealand topped the rankings.

Insight senior ESG analyst Joshua Kendall told our sister publication Portfolio Adviser that clients were requesting sovereigns ESG analysis, which lags information available on corporates.

No ethics

The €694bn fund giant decided against external research providers for its new ratings because they wanted to update models regularly, at least every six months rather than annually, and it wanted to focus ratings on ESG factors that had a material link to credit risk rather than factors.

“There can be an ethical or moral tilt to doing ESG analysis in terms of sovereigns. We believe you should leave ethical decisions to clients and not include them in the models. We felt most of the ESG analysis out there was very ethically focused,” Kendall said.

Ratings were based on an absolute score and a momentum score, which reflected whether sovereigns had been improving or deteriorating on ESG over the last six years. In total 186 countries were analysed.

Europe dominates ESG rankings

New Zealand received the top ESG ranking and was the only non-European country to feature in the top 10. The Asia-Pacific country’s leadership was a surprise, said Kendall, due to it taking environmental risks more seriously than European countries. “But of course, you do have your Scandinavian countries following very closely,” he added.

Top 10 sovereign issuers on ESG (table)

Country ESG score from 0 (best) to 3 (worst)
New Zealand 0.21
Iceland 0.37
Sweden 0.4
Finland 0.41
Spain 0.48
Denmark 0.5
Norway 0.52
Portugal 0.55
Ireland 0.55
Latvia 0.56

Source: Insight Investment

The UK ranked 17th for its ESG score, which also landed it behind Germany, which was 11th, but ahead of France, which was 27th. Insight flagged the UK alongside Australia and Singapore as countries that bucked the trend between high GDP-per-capita metrics typically corresponding to strong environmental scores.

African and Middle Eastern countries were the only sovereign issuers to feature in the bottom 10 with Afghanistan the worst performer, followed by South Sudan and Syria. Insight typically doesn’t invest in those countries anyway, said Kendall.

However, he pointed out that the Ivory Coast was the single issuer that had shown the largest improvement on ESG factors, albeit from a very low base.

US ratings highlight shortcomings

The US received a positive momentum score, which Kendall said highlighted some shortcomings in the current available data, particularly when it comes to environmental and social factors.

“In the case of the environmental and the social, most of the data sets we have are from 2015 and 2016, which means its looking at environmental and social factors from the Obama presidency rather than the Trump presidency,” he said.

The country ranked 32nd for its ESG score.

Green bond issuance from a number of sovereigns in 2018, particularly in Europe, had opened the door for Insight to speak with governments on environmental performance, he said.

“ESG ratings aren’t currently used widely by markets to gage risk. But I do believe countries using green bonds as a way to access finance are probably attracting a wider variety of investors and that should be positive for them over the long term.” Kendall said.

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