- 6:26 - The likes of the U.S., India, China can probably achieve quite rapid change if stringent environmental regulations were even gradually put in place because of the business investment that could then follow.
- 10:39 - The environment is likely to remain the most relevant aspect of ESG analysis, and that’s due to the increasingly visible impact of climate change and environmental degradation on the world and, obviously, the urgency in terms of the need for action.
- 15:48 - China’s increasingly vocal claims about the superiority of its governance model have put Western leaders on the defensive, and, ultimately, a reduction in any commitment by countries to democracy and to personal freedoms would result in a sustained weaker performance in the social and governance aspects of ESG over the medium term.
Lyndsey Anderson is Global Head of Research and Insight at The Economist Intelligence Unit (The EIU), the research arm of The Economist Group. The EIU offers insight and analysis of the economic and political developments in a complex global environment, identifying opportunities, trends and risks on a global scale. Anderson joins Joe Kornik, Editor-in-Chief of VISION by Protiviti, to discuss The EIU’s latest ESG Rating Service report, which measures the environmental, social and governance scores of 150 countries.
Joe Kornik: Welcome to the VISION by Protiviti interview. I’m Joe Kornik, Editor-in-Chief of VISION by Protiviti, our global content resource looking into the future to examine big themes that will impact the C-suite and executive board rooms worldwide. Today, we’re exploring the future of ESG, and I’m thrilled to be joined by Lyndsey Anderson, global head of research and insight at the Economist Intelligence Unit, to discuss its latest ESG rating service report, which measures the environmental, social and governance scores of 150 countries.
The Economist Intelligence Unit, the EIU, offers insight and analysis of the economic and political developments in a complex global environment, identifying opportunities, trends and risks on a global scale. Reviewed quarterly, the ratings identify the markets that are laden with reputational and compliance risks, as well as those that provide supportive environments for ethical operators. Lyndsey, thank you so much for joining me today.
Lyndsey Anderson: Thanks, Joe. It’s really nice to be talking with you.
Joe Kornik: The EIU gave each country a ranking in each category—the E, the S and the G—and that creates one overall ranking. The results are pretty eye-opening. Let’s start with the positive. Europe is far and away the big winner here, led by the Scandinavian countries in continental Europe. Eight European countries, and Australia and New Zealand, make up the top 10. Only 12 countries received an A rating, and 10 of them were in Europe. Why is that? What’s the driving force behind that success in Europe?
Lyndsey Anderson: It is quite stark in terms of that European outperformance, and it is particularly the environment, so it’s particularly the E strand that’s driving this and, in particular, its environmental policies are a major reason why so many European countries rank so highly. Governments in the European Union have invested significant funds into promoting the uptake of global energy sources. EU members also have strong common regulation when it comes to things like protection of water quality, waste disposal, forestry protection, etc.
It’s worth noting some outliers in that E pillar there, that environmental pillar. It’s not just richer, more developed countries that completely dominate that E pillar. The U.S., for example, trails emerging economies such as Chile and Costa Rica and others. If we look at the other two pillars, the social and the governance pillars, that trend is similar. European countries generally fare very well. One aspect of that is, the larger resources have allowed for the more effective regulation of some of these issues—things like corruption, labor conditions, civil rights abuses, etc. That contributes to Europe’s all-around strong showing in the rankings.
Joe Kornik: I’m going to ask you about the U.S. in a little bit, and I do want to dig a little deeper into that, but now I want to go to the flip side. China, Vietnam and Saudi Arabia were among some of the worst-performing countries. It seems we’re not going to be able to make too much progress for the planet without China coming along, so what were the biggest problems for these poor-performing countries? Was it the E, the S, the G, or a little bit of all three?
Lyndsey Anderson: Yes, it is a little bit of all three. China ranks 119th out of 150, Vietnam 122nd, Saudi Arabia 126th. These are low-ranking markets, and it is generally a weaker showing across all the three pillars, so they fall toward the bottom of the rankings for the E, the S and the G.
Vietnam gets its weakest score for the governance pillar. China and Saudi Arabia get their lowest scores for the social pillar. There is a fair bit of nuance within that. Both China and Saudi Arabia score badly for things like freedom of association, freedom of expression. Saudi Arabia performs worse on things like female labor participation and gender equality, whereas China performs worse for some of the labor rights indicators. None rank highly in terms of environmental performance, and that’s due to a limited transition away from fossil fuels, weak protection of domestic ecosystems, etc. It is a very mixed picture for these markets, and there is no one thing pinning them toward the bottom of the ratings, or an obvious area where they could improve and jump up.
Joe Kornik: The report illuminates for me—and maybe this is obvious—that climate and environment, and, specifically, decarbonization is where we still have a lot of heavy lifting to do. Do you also see those findings, and how do we get there? I know the report highlights some dire global situations, like drought in Africa. These are big problems, so I’m curious about how we tackle them. Is there a role for business leaders in solving some of these biggest ESG challenges that we have in front of us?
Lyndsey Anderson: Yes. That’s spot-on in terms of climate and the environment. The environment remains the worst-performing of the three pillars in our ESG ratings. We’ve got only four countries—Denmark, Estonia, Latvia and Lithuania—that received an A rating for that pillar, compared to 16 markets that received an A in the social pillar, 30 markets that received an A in the governance pillar.
And, returning to Europe, the European Union is a good example of how rapidly business investment can respond to ambitious decarbonization, ambitious broader environmental policies. EU countries have been some of the quickest adopters of renewable energy. They have significantly expanded the areas of legally protected ecosystems, made progress with reforestation efforts, and this has all contributed to these highest scores. In terms of how we tackle the issues, other large economies that currently perform far worse on environmental issues, on that E pillar, can learn a lot from the EU. The likes of the U.S., India, China can probably achieve quite rapid change if stringent environmental regulations were even gradually put in place because of the business investment that could then follow.
Notably, of course, the implementation of these regulations can then have global ripple effects, global knock-on impact. For example, sticking with the EU, the minimum standards that have been applied on all sorts of environmental issues, ranging from ethical sourcing of minerals to food quality, they’re forcing suppliers in non-EU countries to align their own products with these higher EU practices. High standards in these larger, better-performing economies can have positive ripple effects on the rest of the world.
In terms of the role of businesses and business leaders, businesses have an enormous role to play in terms of addressing these challenges. A discussion on regulation and policy can sometimes dominate when we’re trying to think in general terms about what progress is being made and what kind of issues are still outstanding. But business leaders and, of course, consumers, the customers of businesses, have a huge role to play in terms of bringing about change. An advantage that many businesses have is that they are often able to be more flexible and more nimble. They can change strategy more quickly in response to emerging challenges than governments often can be, and a lot of very big corporations are also operating in a global marketplace. They’re maybe less constrained by needing to respond to ESG challenges in a way that has to serve a specific national interest.
A crucial first step in terms of the role of businesses, naturally, where a lot of progress has been made, is to ensure that businesses understand the challenges, understand the diverse range of risks that these challenges pose to their businesses. That’s ranging from reputational and compliance risks posed by operating in certain markets to actual physical and infrastructural risks associated with the environmental pillar in particular, with climate change—things like the potential for political instability rise as a result of ESG factors, which can obviously have a very destabilizing effect on businesses at a local level.
Of course, there is an enormous amount of research and data that demonstrates the value creation that a proper strategy for addressing these sorts of ESG challenges can have for businesses. That’s across that whole spectrum, from reducing these sorts of operating risks to missing against potential reputational damage to reducing costs by investing in efficient technologies. Businesses have the potential to be complete partners in addressing these challenges rather than being led by regulation.
It’s not to suggest that contributing to solving some of these ESG-related issues is not without its challenges for businesses, because as you say, Joe, these are big problems, and solving them might necessitate things like more collaboration between businesses that are historically used to being in competition with each other, for example. So, there is this corporate cultural-change challenge that we’ll need to follow on in some areas from this—more ready acknowledgment that individually tackling these things just makes sense in terms of risk mitigation, reputational management, the ability to attract investment, etc.
Joe Kornik: When these business leaders look out a decade or a more, it’s pretty clear that climate and environment are the front-burner issues for a lot of them. Where do you see social and governance globally a decade from now? Where do you think that they will rank? Do you think that the environment will still be the big thing that will be on our plates, or where do you see social and governance in a decade
Lyndsey Anderson: With that time frame, the environment is likely to remain the most relevant aspect of ESG analysis, and that’s due to the increasingly visible impact of climate change and environmental degradation on the world and, obviously, the urgency in terms of the need for action. I mentioned earlier, we’ve got four markets that score an A in that pillar, so that also shows you the amount that still needs to be done. We’ve got a situation where many countries have set this net-zero goals for 2050, and to achieve those, they’ll have to accelerate their energy transition markedly over the coming decade, and that will just increase the prominence of environment on the agenda.
It feels like social issues have come into prominence a little bit more gradually, but we would expect them to continue to advance. So, particularly with things like gender equality and minority rights, they will continue to advance up the agenda and grow in importance. This just feels like a less well-served area in terms of the availability of data to track and measure progress. Maybe less uniformity in terms of agreeing what constitutes good, but the growing calls for this information do support the view that it is going to continue to advance as an issue, albeit, possibly over the next decade, secondarily to the environment. Governance is more complicated. Of course, it remains important, but the increasing size and importance of autocratic economies to the global economy—most obviously China—does complicate the advancement of democratic governance ideals and progress and pushing this up the agenda.
Joe Kornik: One way to think about the future is to take a look at some of the scores and rankings in emerging economies. Uruguay, Chile, Costa Rica did very well, but some of the emerging manufacturing hubs, like Morocco, India and China, did not. When you look at those two sides of the coin, what does that tell you about the future of ESG in 2030 and beyond?
Lyndsey Anderson: As we discussed already, ESG issues are evidently an increasingly important consideration for businesses. Operating in countries with weak performance in aspects of ESG, whether that’s environmental protection or labor rights, can carry significant reputational damage or compliance risks. These considerations do have the potential to slow investment into these weaker-performing markets to the benefit of those economies that could pose lower reputation or compliance risks. Now, of course, manufacturing hubs do tend to have a large energy consumption. Unless this hub that is drawing investment away has a clean-energy matrix, more investment in manufacturing and better-performing markets risks just pushing up emissions and in turn worsening that country’s environmental rating.
The energy mix of those markets that could draw some of that manufacturing investment away is an important thing to consider if we think about that decade-long investment trend. On the flip side of course, the emergence of manufacturing investment going elsewhere does have the potential to drive positive reform in some of the emerging manufacturing hubs that you mentioned. Places like Morocco, Vietnam, Ethiopia help facilitate and drive regulatory change over time, and that brings me back to this earlier point I made about the role of business leaders in choosing where to invest. Businesses can contribute to change, and that is from both the impact-investing standpoint and in terms of encouraging and driving reform.
Joe Kornik: You mentioned earlier political unrest when we talk about the S, the social. There are plenty of alarming findings in this report, but one of the biggest, or one of the most alarming, at least as far as I’m concerned, is the decline of democracy that the report points out that we’re seeing worldwide. What do you make of that? What does that mean for the future of the planet and people on the planet?
Lyndsey Anderson: The scores for governance in our ESG rating, they do echo a trend in the EIU’s annual democracy-index report, an annual report that we produce looking at the state of democracy globally. There’s been a trend for several years how that the world has been experiencing this democratic recession since around 2015. The pandemic, COVID-19, has accelerated that in many ways. That’s raised the power that the governments have over people’s lives, which, in some cases, has led to the erosion of individual freedoms. There have been more country-specific setbacks for democracy, as well as coups on the African continent in 2021, particularly in West Africa.
Probably the biggest trend we see, or the biggest determinant of how democratic values could evolve over the next decade, is something that our analysts have termed the China challenge. China’s economic performance over the past 40 years has created this formidable competitor to the U.S. China’s increasingly vocal claims about the superiority of its governance model have put Western leaders on the defensive, and, ultimately, a reduction in any commitment by countries to democracy and to personal freedoms would result in a sustained weaker performance in the social and governance aspects of ESG over the medium term.
Joe Kornik: I said I would circle back to the U.S. This is my final question for you—you’ve been very generous of your time. I’m based in the U.S., and a lot of our readers for the VISION program are as well, so I have to ask you how the U.S. is doing: Where did the U.S. rank overall, and what do you see as some of its major challenges for the future?
Lyndsey Anderson: The U.S. as a striking underperformer in our ESG rating is the reality. It ranks 33rd out of 150 markets covered. That means it trails most European Union members. It trails many other developed economies such as Australia, New Zealand, Canada, Japan, and it trailed some emerging economies as well—the likes of Uruguay and Chile. The ratings don’t neatly align with income levels—in particular, our data shows that there isn’t a particularly strong linkage between how affluent a country is and its environmental performance as compared to other pillars. Now, there is this stronger correlation between income and the scores for social and the governance pillars. I think that’s what makes the U.S.’s underperformance more striking.
The U.S. bucks the trend where richer countries generally perform more strongly in those social and governance parts of the ratings. The U.S. is ranked 19th out of 150 markets for the social pillar. It’s ranked 21st out of 150 for the governance pillar. It’s bucking the trend in terms of things like the relatively weak protection of labor rights in the U.S. compared to in other developed economies, for example. The environmental pillar is without a doubt the area where the U.S. needs to make more progress in order to climb up the ESG ranking. In the environmental pillar, it ranks 59th out of 150 markets, and it’s dragged down by still-limited uptake of renewable energy, still-significant exports of coal and oil. It still has a long way to go on that E pillar in particular.
Joe Kornik: Thanks, Lyndsey.
Lyndsey Anderson: Thanks very much, Joe. It’s been nice to talk to you.
Joe Kornik: I know those ratings are updated quarterly, so I’ll be checking back in for sure. If you’d like to learn more about the EIU’s ESG Rating Service Report or read more about the rankings, check out the link to the executive summary that we provide in the introduction and show notes. Thanks for watching this VISION by Protiviti interview with the EIU. I’m Joe Kornik, and we’ll see you next time.