How far can country ESG data help identify potential fissures and predict a country's capacity to cope with pandemics and its social and economic ramifications? A senior country analyst looks at the current landscape.

Robeco's senior country analyst Max Schiele has written a timely piece about how the pandemic has put countries in the spotlight, arguing that ESG data is becoming a powerful tool for understanding and mitigating geopolitical and country risks within an investment portfolio. He looks at where countries are ranking on global security and health indexes during these times and how swift and efficient governments have been to act so far using their institutional strengths. All of these data points, some plotted below, are highly variable as countries change tack and learn from one another. But this pandemic, as Schiele points out, is making investors see the world in a new light. The editors are pleased to share these comments and invite responses. To reply, email tom.burroughes@wealthbreifing.com and jackie.bennion@clearviewpublishing.com

The Coronavirus has shaken the foundations of many countries with devastating effect. But many of the structural weaknesses that have exacerbated the crisis, were already visibly evident in country ESG performance data. A closer look reveals striking parallels between ESG scores and effective crisis management. Surprisingly, high scores on health system metrics proved insufficient in predicting a country’s coping capacity - proving that there are no magic indicators with full predictive power. Data must be analyzed collectively and comprehensively for patterns to surface and true root causes to be identified.

Reflective of this, strong governance and institutional indicators were strongly correlated with a country’s coping capacity, helping explain the surprising success and failure of many countries in dealing with the crisis. But strong governance should not be confused with absolute governance; authoritarian regimes have fared no better than Western democracies in combating and controlling the coronavirus’ spread and impact.

For investors the implications are clear - if ESG data can provide insights on a global pandemic, it can also be a powerful tool for understanding and mitigating geopolitical and country risks within an investment portfolio. And, as recent events this year (and last) have emphatically underscored, societal and geopolitical risks can be sweeping and destructive for countries, companies, and portfolios alike.

While the Corona crisis appears to be ebbing in some early hotspots, its spread continues with vengeance in other parts of the world with equally devastating economic impacts. Moreover, the threat of a second pandemic wave has not been averted and the situation remains fluid and far from stable. It is still too early to estimate final death tolls, economic damage, and their potential effects on global financial stability, let alone draw clear and instructive conclusions. And yet, it is obvious that some countries have been more successful in their fight against COVID-19 than others. Indeed, there are early indications that a country’s ESG assessment can provide useful insights into effective crisis management as well as potential pathways to economic recovery.

The COVID-19 pandemic is exposing gaping fissures in the economic, social and political structures of many countries, particularly those most affected by the crisis. A closer look at country ESG profiles reveals those fissures were already evident within ESG data and that striking correlations appear between country ESG performance and their capacity to contain the virus, reduce economic fallout and mitigate socio-political ramifications.

And while the current pandemic began as a public health risk seemingly limited to health and welfare variables (social dimensions within ESG data), it has quickly and aggressively contaminated and crippled the broader macroeconomy. Given the resulting contagion of the macroeconomy, financial markets, the geopolitical landscape and society, it should now be compellingly clear that a country’s ESG profile should be an essential part of investment considerations and decision making.

ESG country data not only gives a read on a country’s social dimension but also on its governance (the “G” in ESG). And as the coronavirus crisis indicates, a country’s “G-force” provides valuable insights when trying to evaluate its capacity to deal with the pandemic and its potential to overcome this crisis.

Pandemic causes and solutions are far from one dimensional
Though health and health systems are at the epicenter, the crisis reveals deeper fractures across other ESG dimensions. The COVID-19 pandemic is a stark reminder of the crucial importance of a widely accessible and strong public health system. But good physical health is only one pre-requisite for a thriving individual, a thriving population and a thriving economy. Other factors within the social dimension such as demographics, living conditions, education and opportunity - in short, human capital - are also essential. A prospering and stable economy requires human beings to live under reasonable and healthy circumstances in order to rely on a productive and adequately skilled workforce. It is therefore imperative that these kinds of social indicators are meaningfully reflected in a country’s sustainability profile.

Moreover, solely focusing on singular ESG data indicators can be dangerously misleading as recent events have proven. For example, trusting in health system variables alone were insufficient in judging a country’s preparedness for this pandemic threat. Examining current numbers of confirmed COVID-19 cases and comparing them with Figure 1 shows that top-ranking countries, based on major healthcare system indicators, are among the hotspots of this pandemic—most notably the United States, Spain, Italy and France.
 
Figure  1  |  Health Security & Health Care Quality of selected countries

The Global Health Security (GHS) Index lists the countries best prepared for a pandemic.
The Health Care Index (GHI) is an estimation of the overall quality of the healthcare system.
Sources: Nuclear Threat Initiative, John Hopkins Center for Health Security, EIU; Numbeo - The Health Care Index by Country

It has become obvious that when a contagious disease strikes with such a punch, even the most advanced health systems can be overwhelmed if other conditions (measured by other ESG dimensions) have not been met.

In countries most severely hit, the disease’s spread may have been more effectively contained if swift and decisive action had been taken early on. Figure 2 provides an early indication of which countries have managed the coronavirus crisis more successfully than others so far.
 
Figure 2: COVID-19 Country Ranking by Safety & Risk

The ranking is based on DKG's framework utilizing raw data from a number of publicly available sources for 72 parameters and aims at assessing the countries in terms of safety and risk in dealing with COVID-19 as well as the economic, political and societal impacts. Source: Deep Knowledge Group