Valuation by means of ESG indicator

Raiffeisen Capital Management has adopted a comprehensive ESG approach. Every country is rated in the form of a score, a sovereign ESG indicator. This rating is intended to cover all important ESG aspects (environmental, social, and governance) and provide an overall idea of how sustainably a country acts. The indicator is calculated for the roughly 120 countries that are included in the investment focus and for which sufficient information is available.

In order to assess countries based on ESG criteria, various topics were identified that are intended to provide an indication of how sustainably countries conduct themselves in terms of both their laws and their actions towards the environment and their citizens. These topics are represented by so-called factors, which are quantitatively available data or time series. These factors must meet certain quality criteria pertaining to their availability, history, update frequency, scope, and consistency as well as the integrity and reputation of the source.

ESG factors for countries

Every factor that is used is assigned to a meta category and underlying categories:

One example of a factor is carbon emissions per capita, which are assigned to the category of climate change under the environmental meta category. The higher the emissions, the lower the contribution to the overall indicator. Naturally, this factor alone would not be nearly sufficient to measure a country’s share in climate change. Therefore, each category includes numerous factors in order to get as accurate a picture as possible of a country’s “conduct”.

One example for the the social aspect is the Gini index – a factor assigned to the category of justice under the social meta category. The Gini index measures the inequality of the distribution of income in a country. A value of 0 would represent completely equal distribution, while 1 would indicate completely unequal distribution. The subject of how equal incomes should be can be debated at great length, but in the sovereign ESG indicator it is assumed that “more equal” incomes have a more positive impact from a sustainability perspective.

The final example is an estimation of the tendency towards corruption in various countries (governance/institutions). A lower tendency towards corruption has a more positive influence on the indicator than a higher tendency.

The factors are often based on data that is released annually. Market data such as the prices of market-traded securities is not used. The indicator does not use any projections for future data, but only historical data that has already been released. The data for each country is generally assessed in comparison with the other countries and the scores are aggregated. Finally, each individual factor and thus each (meta) category must be assigned a weighting that reflects its “importance” in the overall indicator. Together, the factors result in a value between 0 and 100 for each country, with 0 representing the minimum level of ESG alignment and 100 the relative maximum (based on the country comparison).

It is not surprising that the developed countries, and particularly those in northern Europe, have the best scores. The advantages of the developed countries primarily come from the social and governance factors, while the split is less clear for the environmental factors.

The quantitative assessment of ESG categories has its limitations. There is a lack of data in many areas, and some topics cannot be measured at all or only with a significant delay. The political developments of recent months show that the topic of security architecture is most likely underrepresented in the indicator. While the scores of Russia, Belarus, and Ukraine have dropped considerably, conventional concepts such as “The lower a country’s defence spending, the better it is in terms of sustainability” are presumably no longer in keeping with the times. The latter example clearly shows that a country assessment and thus also the sovereign ESG indicator used by Raiffeisen Capital Management must be a living process that is refined on an ongoing basis.

Gernot Mayr
Senior Fund manager, Raiffeisen Kapitalanlage GmbH