Introduction to ESG Investing
In the last decade the global investment landscape has shifted towards sustainable investing due to a number of climate and energy related global initiatives but also due to major changes in the regulatory framework around the globe. In 2015, under the Paris Agreement, commitments were made to drastically reduce greenhouse gas emissions, bringing them “close to zero” by 2050 (often referred to as the Transition to “Net Zero”).
In the European Union, the financial sector in order to achieve the goals of the European Green Deal* and other global climate-related commitments is gradually shifting long-term investments in sustainable projects and other net zero transition related activities, significantly facilitating the mobilization of capital towards these areas. Asset Managers also play an important part in contributing to this global transformation/transition effort. The Sustainable Finance Disclosure Regulation (SFDR) is pushing them to start incorporating sustainability considerations into the reporting requirements. Also from the buy side, many institutional investors and sovereign wealth funds have started integrating non-financial criteria in their investment decision process, in particular Environmental, Social and Governance (ESG) factors, while at the same time green investments are also gaining favor among retail investors.
As the demand for sustainable investing continues to grow, so does the importance of reliable and transparent data with a number of ESG rating agencies already established in this field. Yet, despite (or maybe because of) the increased interest in the field of ESG, a wide and growing divergence emerges between various raters of ESG evaluators when they assess the performance of the same corporates across the globe.
Sovereign ESG Assessment
The area of Sovereign ESG assessment may not be plagued by the same degree of divergence between evaluators but is facing a number of its own challenges. The most obvious of these being the lack of timely data, the choice between focusing on public sector emissions only or emissions of both public and private sector (which introduces the risk of double counting emissions on portfolios that include both sovereign bonds and private sector financial assets such as stocks and corporate bonds) or the choice between including emissions related to domestically consumed goods. Even pure technical choices such as the way to standardize the various metrics can lead to different ranking outcomes, biasing the results in favor of richer/poorer countries, or in favor of manufacturing or services based economies.
Our Approach
Against all these challenges, we do not claim to have discovered profound and definitive answers. Instead, in this study we want to provide our own attempt in understanding the challenges of providing ESG analysis to our colleagues internally at Piraeus Bank and our clients externally, especially those related to the Wealth & Asset Management arm of Piraeus Bank.
In plain English (or Greek) what we do is to construct a database of publicly available metrics on the Environmental, Social and Governance dimensions of Sovereigns' behavior, using a sample of 24 OECD countries. Then in a fully transparent and open way, we standardize and normalize these metrics to make them comparable both cross - sectionally and across-time. Finally, we aggregate all metrics to provide a total sovereign ESG ranking.
Next Steps
Looking to the future, we intend to enrich our coverage both in terms of sovereign but also in terms of metrics we include into our analysis. Eventually, our long – term target is to fully incorporate our ESG Sovereign analysis methodology to our existing sovereign rating model, thus incorporating fully the ESG dimensions into our sovereign analysis.
