Juergen Siemer


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Measuring the impact of investments remains a main challenge for sustainable finance professionals and, together with Climate Change, an overarching theme at TBLI. Sixteen related workshops offer debate on ESG and Impact Investing trends, private equity, portfolio strategy, food production, emerging markets, sustainable energy or philanthropy investing.

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Juergen Siemer

  1. 1. Sustainability Country Rating November 2013
  2. 2. A new tool in the box: Sustainability Country Rating Sustainability is integrated in four steps into the investment process: RobecoSAM has now added the Sustainability Country Ranking to the toolbox: • An industry analysis under sustainability aspects, • initially developed for the sovereign bond traders at Robeco; • a universe screening and • • portfolio construction where the membership to the universe is – amongst other things – limited by minimum sustainability performance and exclusion factors, It analyzes and ranks 59 countries under sustainability aspects; • It provides a long-term view to the risks and chances of countries, in addition to the bondgrades provides by the ratings agencies • and the fundamental company valuation in which the sustainability performance or score has an impact on the valuation of a company; 2
  3. 3. Sustainability as an Extension to Sovereign Ratings Sovereign Ratings as developed by rating agencies (Moody‘s, Fitch, S&P) are statements on the default-probability of sovereign bonds. As such the ratings correspond with the (remaining) terms of the bonds. The capability and willingness of governments to honour their debt is primarily caused by a) the level of existing debt, and b) the current/new deficit, which depends – among others - on the position in the economic cycle. Overall this means, an assessment of abilities of governments to increase tax receipts or to reduce expenditures. Hence, the focus of classical sovereign bond ratings is more on short term factors with a direct impact, and less weight is given to factors whose impact is rather long term or more indirect. We subsume those additional long term/more indirect factors under „sustainability“. 3
  4. 4. Conceptual Framework i) Criteria selection based on plausibility-checks; currently the model contains more than 250 subcriteria/dataseries; ii) weights are set explicitly in the model and based on our subjective opinion (e.g. 65% for governance criteria, 20% for social, and 15% for environmental criteria); iii) ranking scores are then calculated for each country; iv) the validity of the scores is then tested in a regression analysis of scores against the changes in credit default swaps of sovereign bonds. • The Ranking covers the OECD-countries plus important emerging market countries (currently in total 59 countries). • New criteria are constantly evaluated. 4
  5. 5. Citeria and wheights Dimension Level Indicator Level Subindicator Level Environmental Dimension 15% General Environmental Data (5%) Various data series on the atmosphere, water and land resources, biodiversity Energy (5%) Various data series on the use and trade of energy and renewable energies in particular Environmental Risk (5%) Various data series describing the exposure to environmental/natural risks and the capabilities to mitigate or to adapt to risks Social Indicators (10%) Various data series focusing on education, welfare, world and equality parameters Human Development Index (10%) Data series taken fro the UN used to calculate the UN development index Strikes and Lockouts (5%) Data taken from the ILO on strikes and lockouts Governance - Quality (10%) Various data series on political rights, civil liberties, and quality parameters on governance Competitiveness (10%) Various data series taken from the World Economic Forum on institutions, infrastructure and market efficiencies, and innovation Political Risk (10%) Various data series on stability, conflicts and corruption Governance - Structure (15%) Data taken from the World Bank on the rule of law, accountability etc. Ageing (10%) Various data series on ageing, demographic policies and cost Monetary Policy (5%) Various data series on monetary institutions and policies and further structural issues Social Dimension 25% Governance Dimension 60% 5
  6. 6. Results in Excel-Sheets 6
  7. 7. Additional Comments: Version 2 of the Robeco-/RobecoSAM model is now out. • The better the score, the cheaper and the more stable the CDS-spreads. The RankingScores can explain up to 1/3 of the variations of CDS-spreads. • As we assume that 1/3 is explainable by the Sovereign-Bond-Rating and another 1/3 by the current position in the economic cycle, the model seems to be robust. • The high weight of institutional factors shows: Decisive is the ability of governments to react to challenges. • But: The explanatory power of the scores is low for some developed countries. .... Isn‘t that a surprise when these countries, resp. their central banks, manipulate the capital markets? 7
  8. 8. But the rankings may be put into perspective... France • Gross Debt to GDP: - 100% (2011); -105% (2012) • Public Deficit to GDP: -5.2% (2011); -4.5% (2102) • Current Account Balance to GDP: -2.0% (2011); -2.1% (2012) • S&P Local Currency Rating: AA+ (as of 14.05.2013) • Since the late 1970s, the general government deficit has always been in deficit. The main cause has been the sharp rise in public spending, primarily on pensions and healthcare. In 2011 France had the second highest public spending ratio among OECD countries. The share of public employment in total employment was 23%, the highest ratio in the OECD except in Nordic countries. The resulting high level of taxes creates distortions that weigh heavily on the economy. Insight from the sustainability analysis: France scores weak on indicators related to public governance and on ageing; In spite of its comparatively good demographics, France’s financial problems are caused by huge and rising deficits in its pension and health care system and in the costs of its very large public labor force; It is not clear if the current government has the will and the ability to propose and enforce the necessary cuts in subsidies for the pension and health care system and to reduce the number of public employees; 8
  9. 9. ... And Switzerland Switzerland • Gross Debt to GDP: - 40% (2011); -39% (2012) • Public Deficit to GDP: +0.5% (2011); +0.7% (2012) • Current Account Balance to GDP: +10.4% (2011); +11.5% (2012) • S&P Local Currency Rating: AAA (as of 14.05.2013) • Capital markets’ concerns regarding sovereign debt in several countries have led the Swiss franc to appreciate to record levels. The SNB has introduced an upper limit on the Euro/Swiss franc exchange rate to stop appreciation. While keeping interest rates low for some time is appropriate, unusually low interest rates have boosted mortgage lending and house prices. Switzerland is running the risk of importing asset price inflation. Insight from the sustainability analysis: Switzerland is a top country both in financial terms and with regard to sustainability; The only significant weakness in Switzerland’s sustainability profile lies in the ageing of its population; So far this risk has mostly been mitigated by immigration; As further immigration may face acceptance-problems in the Swiss population, it may be necessary to increase the financial reserves for age-related future spending (and to convince its own population to invest more in its own families); 9
  10. 10. Disclaimer No warranty This publication is derived from sources believed to be accurate and reliable, but neither its accuracy nor completeness is guaranteed. The material and information in this publication are provided "as is" and without warranties of any kind, either expressed or implied. RobecoSAM AG and its related, affiliated and subsidiary companies disclaim all warranties, expressed or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose. Any opinions and views in this publication (especially the Insights on slides 8-10) reflect the current judgment of the authors and may change without notice. It is each reader's responsibility to evaluate the accuracy, completeness and usefulness of any opinions, advice, services or other information provided in this publication. Limitation of liability All information contained in this publication is distributed with the understanding that the authors, publishers and distributors are not rendering legal, accounting or other professional advice or opinions on specific facts or matters and accordingly assume no liability whatsoever in connection with its use. In no event shall RobecoSAM AG and its related, affiliated and subsidiary companies be liable for any direct, indirect, special, incidental or consequential damages arising out of the use of any opinion or information expressly or implicitly contained in this publication. Copyright Unless otherwise noted, text, images and layout of this publication are the exclusive property of RobecoSAM AG and/or its related, affiliated and subsidiary companies and may not be copied or distributed, in whole or in part, without the express written consent of RobecoSAM AG or its related, affiliated and subsidiary companies. No Offer The information and opinions contained in this publication constitutes neither a solicitation, nor a recommendation, nor an offer to buy or sell investment instruments or other services, or to engage in any other kind of transaction. The information described in this publication is not directed to persons in any jurisdiction where the provision of such information would run counter to local laws and regulation. 10