Broad generalizations about countries with regard to Responsible Investing can be misleading when constructing portfolios. For example, countries in Developed Markets are generally considered to be ahead of countries in Emerging Markets on factors related to Reponsible Investing, yet the difference in score is surprisingly low. Further, some countries in the Developed Market, such as Switzerland, score much lower than many countries in Emerging Markets. Conversely, some countries in Emerging Markets, such as South Africa, score much higher than some countries in Developed Markets.
The key points are:
Generalizations about countries also tend to become less valuable over time. Over the course of the 21st century countries have generally improved; though the scores of individual countries went both up and down during the period; sometimes significantly.
Even as a country takes the actions required to improve their country score, if they are not improving as rapidly as other countries, then their relative rank will not improve. One country where that has happened is Taiwan. Taiwan is the third largest equity market in the Emerging Markets. Despite its large equity market and substantial economic success, the country has not scored very well from a Responsible Investing perspective. In addition to having a low country score, Taiwan has not been a particularly attractive equity market.
Countries who receive high scores according to the Sustainable Wealth Creation principles are required to have more than strong intent and/or rules; there must be evidence that the companies within the country adopt the intended behavior. Further, high-scoring countries also have healthy economic infrastructures where investors are more likely to consider Responsible Investing important, thus creating demand for continued improvement by the companies within the country.
In essence, Countries Matter™ when building an SRI or ESG investment portfolio.
Looking for more perspective on sustainable investing? Download our whitepaper: “Country Selection – An Important Addition to Responsible Investing.” Follow Magni Global Asset Management on LinkedIn and Twitter @MagniGlobal, #CountriesMatter.