New analysis of developing and advanced countries suggests link between economic and ESG performance
While ESG factors are mainly used to gauge returns and risks associated with companies and industries, a new paper from FTSE Russell examines the possibility that ESG performance could also matter for broader economies and those that invest in their debt.
In a paper titled An ESG Analysis of the Pandemic Crisis, researchers from FTSE Russell examined a 41-economy universe that includes more than 107 million Covid-19 cases and over 2.3 million casualties officially reported as of August 31, 2021.
The countries were selected from the FTSE World Government Bond Index based on several criteria, including whether they have handled the pandemic with a “mitigation strategy” that resorted to lockdowns only once the virus was widespread, rather than using them pre-emptively; their geographical position; heterogeneous levels of economic development; and the severity of the pandemic’s impact on them.
Most of the countries with the worst outbreaks, they found were in Europe, North America, and South America, three regions that were at the epicenters of the global outbreak. That group also included some of the most advanced and globalized economies, which meant they could not immediately cut off the trading activities that sustain their populations and businesses.
“[M]ost of these economies had not dealt with a significant health crisis within the past century and were, therefore, ill prepared for the huge strain on services and emergencies that came with it,” the authors added.
While the death toll of the pandemic has been most severe predominantly among emerging markets and developing economies (EMDEs), the researchers sought to isolate the possible contribution of ESG performance in countries’ ability to manage Covid-19. Using an in-house econometric model, ESG Factor-IN, which links country economic with ESG performance, they tested the assumption that countries’ social and governance performance significantly affected the number of cases and deaths attributed to the Covid-19 pandemic.
“Indeed, indicators from the social pillar, for example, such as health issues, life conditions and lifestyle risks, vulnerability, etc. constitute important parameters of how each economy fared during the COVID-19 pandemic,” they said. “From a G perspective, we can easily understand that political effectiveness and stability can be primary factors to explain the good management of the COVID-19 pandemic.”
Countries’ overall Social Performance score, the researchers found, was strongly correlated with the economies’ level of development, which meant high-income economies tended to do better on this measure. On the governance side, they found one specific metric, Political Effectiveness, did not display as much of an income bias.
“Governance performance, it appears to be a key variable in pandemic management in so far as the income bias ingrained in ESG scores is much less prevalent here,” they said.
Using econometric analysis, they confirmed that overall Social Performance and Political Effectiveness scores are negatively correlated with the deaths per million inhabitants due to the COVID-19 pandemic. All other things being equal, higher overall Social Performance and Political Effectiveness scores corresponded to lower COVID-19 mortality rates.
“Subject to further research, this would indicate that countries with higher Social Performance and Political Effectiveness scores performed better overall with their management of the pandemic,” they said. “Countries that suffered the most from the COVID-19 pandemic were also those whose sovereign spreads widened during the pandemic, putting further financial pressure on their economies.”
