Country-level environmental, social and governance (ESG) scores fell for a second consecutive year in 2022, as the impact of the pandemic reversed advances made over the previous decade.

We launched our Global Macro ESG Index in 2018 to help monitor progress made towards the United Nations’ 17 Sustainable Development Goals (SDGs).

Today, this index scores and ranks 135 countries against 20 ESG indicators to assist decision making within our investment teams.

In addition to identifying and tracking macro ESG indicators and risks, the index and country ranking play an important role in the investment process for abrdn strategies such as the Responsible Global Asset Strategies (RGAS) fund, that’s managed by our Multi-Asset Investment Solutions team.

Time for an update

The ESG ranking is updated each year. Following Russia’s invasion of Ukraine last year, we added a new conflict risk assessment framework to monitor the risks associated with wars, domestic unrest, and human rights violations.

Read the paper

In a post-globalisation era of rising inequality and heightened geopolitical tension, risk analysis must take into consideration the growing possibility of disputes erupting into violence

Here are six key findings from the latest update:

  • Political and Governance (P&G) scores are on a longer downward trend as democratic institutions have weakened, and many authoritarian regimes have become harsher
  • Scandinavian countries, with Sweden in the vanguard, continue to lead; the top nine performers are from northern or western Europe (see Chart)
  • Malawi and Niger beat Switzerland and Germany in the development-adjusted index; India and China underperform on a development-adjusted basis, due to poor environmental and P&G scores respectively
  • China improves on environmental and social measures but still lags other middle-income countries; like many other countries, its P&G score is moving in the wrong direction
  • India and Brazil have underperformed in each of the ESG measures since 2012
  • Many countries with low ESG scores also face the most acute conflict risks; such risks are also significant in many countries that may otherwise perform in the middle of the pack

Northern European countries lead the 2022 abrdn Research Institute Global Macro ESG Index

Source: aRI, November 2022

In Focus – Conflict risk

Wars and international sanctions are an ESG issue because weak governance can lead to human rights violations; countries with weaker social scores and political institutions may be vulnerable to social unrest and coups; authoritarian regimes may be more likely to launch wars of aggression. Each of these factors can lead to significant investment risks.

That said, a country’s ESG profile can be tricky to interpret. For example, Russia may score badly on P&G metrics, but it also ranks well on social and environmental measures. While its position in the top half of the overall ranking may indicate it is ‘investable’, its invasion of a neighbouring country and the subsequent international sanctions have forced investors to reassess.

Had the conflict-risk mechanism been in place before last year’s invasion, Russia would been flagged as a ‘very high’ risk given its years-long record of destabilising Ukraine, including annexing Crimea in 2014. In the future, this addition should help send more powerful signals to investment teams about the nature of risks they are exposed to, helping them adjust accordingly.

Many of the index laggards have recently been at war or have entrenched human rights issues – indicating a clear correlation between P&G scores and conflict risks. Adding a conflict dimension to the analysis – using qualitative and quantitative methods – helps us to identify countries that may look good on other metrics but are susceptible to one of the most severe investment risks of all.

Global Macro ESG Index in action – RGAS

The abrdn Responsible Global Asset Strategies (RGAS) fund incorporates the Global ESG Index to screen out the highest-risk countries before fund managers assess potential investments.

The annual ESG index ranking is reviewed by RGAS fund managers who exclude from investment consideration the more than 30 countries that fall within the bottom 25%.

Additionally, the conflict risk methodology helps assess the risk profile of countries (e.g., Russia) that may be permitted by the country screen but could be excluded because of very-high risk parameters such as conflict, sanctions, or human rights abuses.

Currently, government bonds and instruments used to express interest rate and currency views linked to China, India and Turkey are excluded from investment consideration for RGAS, based on the Index’s view that these countries present higher ESG risks.

As a result of excluding the bottom 25% of the index, RGAS holdings in government bonds, interest rates and currencies will have a better overall ESG profile than might otherwise have been the case had the lowest-scoring countries been accessible.