Alliance Notes 4/21/20: Webinar on Coronavirus and Climate Change in EM; Inside the Index: Global Health Security

Tuesday, April 21, 2020

This Week at the Alliance

Announcements

Webinar: How Emerging Market Companies Will Fight the Coronavirus and Climate Change (4/28 9:30 EDT / 14:30 BST)

Join the Alliance and Reuters Events for a live, interactive panel discussion of EM’s fiscal capacity to chart a sustainable course through coronavirus, global recession and climate change. 

Our lineup features NDC Partnership’s Jahan Chowdhury and the Inter-American Development Bank’s Gianleo Frisari in conversation with Alliance Directors Claire Meier Underhill and Fergus McCormick. The panelists will explore:

  • What fiscal space do emerging markets have to combat the pressures of pandemic, economic fallout and climate change?
  • How are EM climate change best practices changing in light of the current crises?
  • Will sustainability-based stimulus packages be de facto or de jure, and can they revive growth and deliver financial returns in the wake of Covid-19?

Register now.

Inside the Index: Global Health Security

The mainstreaming of ESG integration strategies is a clear acknowledgement of the fact that non-financial factors can affect economic prospects and investment opportunities. History offers no shortage of examples in which a country’s poor management of sustainability  challenges—be they pollution, inequality, graft or other issues—have led to shocks and losses, just as investments in sustainability and policy reform have catalyzed growth. The UN counts public health among these decisive indicators of stability and prosperity, including “Good Health and Well-Being” as the third of its 17 Sustainable Development Goals (SDGs). Many data sources, some overlapping, have undertaken to measure and assess global progress in this area. As governments around the world battle the unprecedented coronavirus pandemic, these assessments of health and testing capacity arguably show promise as ESG tools for investors.

One such index is much-discussed The Global Health Security (GHS) Index, a project of the Nuclear Threat Initiative and the Johns Hopkins Center for Health Security that  was developed in partnership with the Economist Intelligence Unit. The GHS Index is the first attempt to benchmark health security in 195 countries; its stated mission is “to assess a country’s technical, financial, socioeconomic, and political capabilities to prevent, detect, and rapidly respond to epidemic threats with international implications, whether naturally occurring, deliberate or accidental.” Composed of 34 indicators and 140 questions, the Index was released in October 2019 and came to prominence with the outbreak of the novel coronavirus in December. Could this index improve and inform our investment process during or after this crisis?

Immediately striking is the sheer scope of the mandate assigned to this index. The broad purpose suggests a diverse audience and provides a clue for investment analysts that not all factors that the index considers may be pertinent to their cause. This is confirmed when we begin to graph a country’s final score against the pandemic variables with which we are concerned (see Fig.1). 

The GHS Index’s output of a numerical score for preparedness suggests an exactness that belies its highly general methodology. Out of the index’s 140 questions, about 65% are strictly Yes or No (scoring 0 or 100) and account for over 75% of the points in the default expert weighting (see Fig. 2). 

The way this survey is presented serves to reward a country with a large bureaucracy and administration, notably lacking in emerging markets that score much lower overall. A country gains points for having response plans or dedicated personnel on reserve without an assessment of quality or their other priorities. The eighth most heavily weighted question is whether there is a plan to address routine or emergency demand for personal protective equipment (PPE). Of 195 countries, only eight had plans and scored 100: the United States, China, Austria, Malaysia, Mongolia, Serbia, Slovenia and the Gambia. While it is somewhat useful for an analyst to know that a plan exists, it would be far better to answer the question of its viability before boosting the country’s score, assuming it even makes sense to include this indicator in a relative ranking when so few countries possess one. In the process of benchmarking, it is standard protocol first to incorporate every potentially relevant factor before finely editing which metrics add value.

The more useful part of the GHS Index is the written report on recommendations. Drawing on deeper knowledge and expertise gained over the course of the construction and maintenance of the index, the authors offer commentary on data deficits, urgent risks, emergent new threats and which priority actions will yield the most multiplicative benefits. These recommendations are written for a wide audience, but they allow an educated investor to deduce the implications for their portfolio—in contrast with the quantitative portion. While scores and rankings seem to offer a comfortingly straightforward evaluation, the analyst must vet an index vigorously and iteratively in order to use it with confidence. The broader an index’s mandate, the more difficult it is to ensure that the score reflects a perspective relevant to the investment profession. 

To date, ESG infrastructure remains in the nascent stages of development, forcing even the IMF and UN to edit metrics and indices frequently. Emerging markets investors should empathize with the difficulties of reporting statistics in previously uncharted areas and be uplifted at the chance to participate in their construction and improve their usefulness. They should also beware: It is common for firms seeking ESG compliance to outsource due diligence to headline scores or index rankings without assessing the appropriateness of those metrics. Equally damaging is the propensity for benchmarks to use score cutoffs to restrict investment universes, channelling investor energies into understanding index esoterica rather than more productive analysis. If we are to advance a more holistic and accurate approach to ESG integration, continuing education on these topics will be necessary, including a healthy amount of criticism of the existing methodologies and datasets. – Ken Colangelo

Emerging Markets Investors Alliance

The Emerging Markets Investors Alliance is a 501(c)(3) non-profit organization
that enables institutional emerging market investors to support good governance, promote sustainable development, and improve investment performance in the
governments and companies in which they invest.

www.eminvestorsalliance.org


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