The new evolved model implemented by CANDRIAM puts climate change and environmental preservations at the core of investment process.
CANDRIAM, European multi-specialist asset manager with around EUR 128 billion of AuM, who just obtained the State SRI label for 16 funds across various asset classes and management strategies, introduces 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.
Destruction of natural environment produces long-term consequences.
This approach recognizes that Natural Capital is finite. To incorporate this constraint in the most recent model, CANDRIAM uses the Natural Capital score as a multiplier for the other three types of capital. The model output also takes into account progress towards achieving the 17 UN Sustainable Development Goals and integrates more than 400 individual factors in order to capture a large range of factors.
According to their 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.
CANDRIAM is highlighting a dichotomy between a weak and a strong sustainability. The first assumes that “natural capital and manufactured capital are freely interchangeable, and what matters is the total amount of capital stock that we preserve for future generations, can result in the notion that destruction of natural resources has a cost, and that as long as that cost is reflected in the market price, the activity is sustainable. While a strong sustainability considers that Natural Capital should be treated as a complex and non-substitutable system of critical elements, making a unique contribution to well-being, welfare and more specifically to socio-economic development. Difference between the two is that there is no price to pay for irreversible damage done for the future generations.
“Sustainability is development that meets the needs of the present without comprising the ability of future generations to meet their own needs.” Brutland Report, 1978
Externalities & Materiality
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, 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.
The study approaches the 4 pillars starting with Natural Capital through the scope of Deforestation, the Human Capital with a focus on Health, the Social Capital through the Rule of Law, and the Economic Capital through an important yet frequently overlooked topic, the Trade Sustainability. By placing Natural Capital at the center of the Sovereign Sustainability model, CANDRIAM is offering a unique and forward-looking outlook on sustainability analysis.
‘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.”Kroum Sourov, Sovereign Sustainability Analyst at CANDRIAM
The full report can be found here