Candriam, a global sustainable and multi-asset focused investment manager, has introduced its updated Sovereign Sustainability Model, highlighting how the emphasis of sovereign analysis must shift from economic development to sustainable development.
The most important change is the move from a model that put four types of capital (Human Capital, Social Capital, Economic Capital, and Natural Capital at the same level, to one that focuses more on how countries manage their Natural Capital, as well as the interdependencies between Natural Capital and the three other capital forms.
The company says that, according to its analysis, most of the environmental impact over the coming decade has already been determined by current and past economic activities and Natural Capital cannot be replaced with other forms of capital. Therefore how countries manage their Natural Capital will, to a significant extent, shape their social and economic development.
For example, in the case of deforestation, land use change and habitat destruction all contribute to ecosystem degradation, which in turn exacerbates climate change and increases the severity of natural disasters. Related to this, research has found direct links between ecosystem degradation and zoonotic disease transmission from wild animal populations to humans. Such transmission is suspected in the case of the covid-19 pandemic, for instance.
Candriam's Sovereign Sustainability model shows that sustainability measures declined over the twelve-month data period analysed, both in developed markets and in emerging markets. However, the 2020 change in methodology did not affect the overall leader, Switzerland, due to its very high scores in all four types of capital, especially in Natural Capital. Switzerland was closely followed by Sweden (2nd place), Denmark (3rd), and Finland (4th).
The most significant changes in developed market ranking due to the updated methodology were experienced by Australia (28). The country suffered from its low Natural Capital score, driven by its high carbon footprint. Australia has one of the worst trends in GHG emissions globally, as well as in use of natural resources, relying on mining and hydrocarbon exports to a much greater extent than its peer group.
Norway (15th) and the Netherlands (12th) also experienced reduced rankings under the new methodology, with each suffering an 8-spot decline in the overall list. In Norway's case, the main scoring drag was oil & gas exports. As for the Netherlands, it suffered from its still-high proportion of fossil fuels-based energy generation in comparison to its peer group, as well as from its high exposure to climate change and sea level rise. Slower energy transition has had many unintended consequences.
The research finds that if environmentally inefficient countries continue to deplete large amounts of natural resources, they will eventually experience a negative impact across four types of capital - Human Capital, Social Capital, Economic Capital, and Natural Capital - which will have devastating social, economic, and environmental repercussions. By placing Natural Capital at the centre of the Sovereign Sustainability model, Candriam offers a unique and forward-looking outlook on sustainability analysis.
Commenting on the findings, Vincent Hamelink, chief investment officer, said: "We are excited to launch our updated Sovereign Sustainability model which recognises that the destruction of our natural environment produces long-term economic and social consequences. The investment community must integrate these factors in order to maximize long term value creation."
Kroum Sourov, Candriam's sovereign sustainability analyst, commented: "While we are excited to see increased recognition of the importance of climate change and environmental preservation by regulators, we believe that industry should take the lead in implementing changes in the way that we think about production, consumption, and investing. Sustainability issues can no longer be papered over, as the cracks have become just too large."