ENVIRONMENTAL OBJECTIVE
SOCIAL OBJECTIVE
Objective: Advancement in climate change adaptation and mitigation
Objective: Advancement in Sustainable Development Goals, with emphasis on life expectancy and education Measurement of alignment: Based on life expectancy, expected and realized secondary education and overall progress toward SDGs; portfolio exposure tilted toward: 1. Countries in the top 25th percentile in latest-year scores 2. Countries in the second 25th percentile showing improvement over the latest three years
Measurement of alignment: Based on income-adjusted climate change vulnerability and resilience measures and progress in reducing omissions per GDP; portfolio exposure tilted toward: 1. Countries in the top 25th percentile in latest-year scores 2. Countries in the second 25th percentile showing improvement over the latest three years
An active approach to sustainability in emerging markets We believe standard sovereign ESG ratings can be misleading and even lead to undesirable outcomes. Richer countries tend to have stronger institutions and lower social inequality, which is why the World Bank calculates that 90% of the variation in sovereign ESG scores can be explained by differences in per-capita national income. If money follows ratings, economically developing countries miss out on funding for SDGs. That is why we advocate a forward-looking perspective: we can look more favorably on poorer countries with lower third-party ESG ratings even than countries we exclude, if they show strong progress.
Importantly, we also think that this forward-looking perspective influences the sustainability goals that an investor should emphasize. In the emerging world social goals, life expectancy and education are key because they create the essential foundations for enhancing so many other SDGs. We also see an increasing role for engagement. While country-level progress can be slow and modest, it can contribute to better performance in key areas such as carbon emissions, global tax transparency and corruption, money-laundering and terrorism financing.
52 2021 ESG ANNUAL REPORT
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