Social Capitalism: Taking a wider view of national progress

Jeremy Lawson,Head of ASI Research Institute
Stephanie Kelly,Senior Political Economist
Yashaswini Dunga,Graduate
Nancy Hardie,Graduate

The need for high quality primary research has never been greater. The world, the financial markets and our industry are confronting political, regulatory and other structural challenges. Understanding the impact of these challenges is critical to our understanding of the investment landscape.

To ensure that we meet these challenges I established the Aberdeen Standard Investments Research Institute (ASIRI).

ASIRI's mission is to establish Aberdeen Standard Investments (ASI) as a thought leader among global asset managers, connecting economics, politics and policy to long-term public and private market returns and opportunities, as well as reshaping the industry's investment horizons.

As a key driver of ASI's economic and thematic research agenda, it will provide insights that influence the firm's portfolio investment decisions, helping to deliver strong relationships with, and outcomes for, the firm's clients.

And by acting as a conduit and incubator for research insights across ASI, the Research Institute will encourage foster collaborative, strategic relationships with internal stakeholders, policymakers and academia.

It is therefore my pleasure to introduce ASIRI's first Research Perspectives; Social Capitalism: Taking a Wider View of National Progress.

The authors have developed a new indicator of national success that blends progress on economic goals with indicators of sustainable development. The research, which is underpinned by a new proprietary ESG index for 135 countries, provides a wider lens with which to view the world.

Most importantly, it demonstrates that strong economic performance need not come at the expense of the environmental, social and political goals that bind societies and the international community together.

Keith Skeoch

Chief Executive Officer and Chair of ASI Research Institute
Aberdeen Standard Investments


Chart 1: Dimensions of economic and ESG performance – an interactive mapping tool

Executive summary

The most successful societies blend strong economies with healthy environments, inclusive social policies, representative political institutions and fair legal frameworks. To recognise this we have built a new indicator of national progress for 135 countries that measures the extent to which they are persistently economically dynamic and making progress on meeting UN Sustainable Development aligned environmental, social and governance (ESG) goals.

Our results are a testament to the benefits of more open economies and societies, a message that risks being lost amidst the wave of political populism that is sweeping through the developed world and some prominent developing economies.

Not only have the vast majority of developing countries converged on US and broader developed country living standards over the past decade – a distinct improvement since the 80s and 90s - but in many cases this has been accompanied by strong progress on sustainable development objectives. This reveals the supposed trade-off between strong economies and strong societies to be a false one.

It also highlights the benefits of globalisation and at a time when support is dangerously low. Without globalisation much of the poverty reduction in the developing countries over the past 20 years would not have been possible. This is a good news story that deserves to be more celebrated. Moreover, stronger absolute and relative growth is helping to provide the resources for and build political coalitions to support the ESG goals that will make future growth more sustainable.

For developing countries to sustain this strong growth performance – relative both to the developed economies and their own past performance – over the next decade and beyond, further domestic economic and institutional reforms will be necessary, especially because the strong tailwind from globalisation can no longer be taken for granted.

Based on economic growth data for the past five years and ESG scores for 2017 we have identified 46 countries that are exceeding both their development-adjusted growth and ESG benchmarks. The vast majority of these 'Social Capitalist' countries are developing economies and can be viewed as hunting grounds for the places that will generate both global economic and sustainable development leadership over the next 20 years.

Chart 1 is an interactive mapping tool that enables readers to visualise the 'Social Capitalist' countries and navigate absolute and relative economic and ESG performance over time.

Although two of the most prominent developing economies - India and China - do not make the 'Social Capitalist' grade, both have been persistently economically dynamic. Moreover, recent developments suggest that their governments are placing more weight on broader measures of progress. If China is to become a 'Social Capitalist' it will need to improve the transparency and representativeness of its political and governance institutions in particular. In India, the focus should be on environmental indicators and social equality.

Conversely, the majority of developed economies – particularly in the Eurozone - have outperformed their ESG benchmarks but failed to generate robust economic growth over the past five years. The danger is that this persistently weak economic growth will amplify existing populist pressures and eventually undermine support for broader sustainability goals.

If developed countries' commitment to open economies and societies were to weaken further, it will inevitably weigh on their own growth prospects. It would also damage the prospects for further catch-up growth in developing countries. At a time of enormous productivity, demographic, social and environmental challenges this would prove especially counterproductive. The task then is to identify country specific political and policy solutions that can reconcile each of these objectives.

Exceptions to the pattern of weak economic performance and strong ESG performance among the developed economies include countries like Portugal, Ireland and Sweden, which have performed well across both dimensions. Meanwhile, Japan stands out – contrary to general wisdom – as an economy that has been more economically dynamic than most, with the country's shrinking population masking relatively healthy productivity performance. Abenomics has not been the failure it is sometimes made out to be.

Although most countries' ESG scores have been on a rising trend over time, there is a lot of room for improvement. Most countries are not doing enough to reduce greenhouse gas emissions and limit the damage from climate change, nor improve air quality. And while income and other inequalities between developed and developing countries have been shrinking, disparities within countries are high and have risen over recent decades. Addressing these is important for gaining broad-based buy-in for growth-enhancing reforms.

The tools we have developed can be used in a number of useful ways. For policymakers they can be used a benchmark for assessing absolute and relative national performance. And investors can use them as a screen to support asset allocation decisions and product development. For example, there was a modest positive correlation between average annual per capita growth and average annualised real equity returns over the past five years.

They can also be easily disaggregated to allow the user to focus on whichever component of our analysis is most useful to them. Future papers will extend the necessarily high-level analysis of this paper by exploring country and indicator level case studies in more depth. We will also explore the links between growth performance, ESG performance and asset returns more rigorously.

Our work reinforces a strong history of ESG-related work and research at Aberdeen Standard Investments. Our ESG index builds on a screen developed for the developing economies by our Emerging Market Debt team that already underpins funds we are offering to clients. And we have collaborated closely with our ESG research team, who continue to advance the firm's thought leadership in this area, while working with companies and other internal investment teams to ensure environmental, social and governance factors are properly taken into account.


Wanted: a new
measure of progress

Chapter 1

Much of what passes for the macroeconomic analysis serving the investment community is very narrow in its scope. Economic outlooks tend to focus on short-term growth dynamics in a small number of large economies like the United States, Eurozone, China and Japan, and are heavily tilted towards what is happening in the developed world.

Because these economies make up the bulk of the world's liquid investable assets, this approach is understandable. But it also has a number of important limitations:

  • By focusing too much on the short-term the more persistent forces and trends that drive longer-term economic progress and asset returns are less well understood.

  • The strong tilt towards developments in the richest economies neglects what is happening in countries where the bulk of the world's population lives, and where dynamic change is often the most prevalent.

  • It ignores the broader environmental, social and political context in which people live and is critical for the long-term sustainability of economic growth.

ASI already seeks to redress some of these gaps. Our Emerging Market Debt and Equity teams have long drawn attention to the long-term economic and governance improvements taking place in many emerging economies. The Emerging Market Debt team have then taken that a step further by developing an ESG screen for developing countries that underpins funds we offer to our clients. And our ESG team continues to lead research in this space, working with companies and internal investment teams to ensure that environmental, social and governance factors are taken into account in the investment process.

This project adds to this work by developing a new indicator of national progress that integrates ESG performance (aligned with the United Nations Sustainability Goals) with measures of longer-term economic performance and removes the development bias that plagues most other approaches to ranking and comparing countries.

By identifying countries that are persistently dynamic in both economic and ESG terms – which we call 'Social Capitalists' – we hope to equip investors with a wider lens with which to assess national progress as well as a more comprehensive toolkit to make their investment decisions. It also provides a mechanism for investors to align their financial interests with their values, while making it easier to identify untapped markets with significant future investment potential.


What is a Social

Chapter 2

Social Capitalists are countries with persistently strong economic and ESG performance relative to their level of economic development.

Measuring economic dynamism

The first 'Capitalist' arm relates to whether a country's per capita GDP in purchasing power terms has grown more quickly over the past five years than one would expect given their current level of economic development as well as their past economic performance. This dual approach takes account of the fact that poorer countries should be able to grow faster than richer countries while also rewarding countries who are able to overcome previous obstacles to growth.

To calculate this, we break the past 30 years into five five-year non-overlapping blocks and use a panel model to regress average annualised per capita growth in a given five-year period on the level of GDP per capita five years earlier across 135 countries. This includes a country specific constant that controls for time invariant factors that have influenced average per capita growth over the past 30 years (see Technical Appendix for more details).

The equation estimated is:


The dependent variable is the average annual growth rate of real per capita GDP over five years. The term αi represents the country fixed effects and the independent variable is the log of the real per capita income from five years before.

We focus on per capita growth because it removes the direct effect of population growth on overall economic growth allowing us to focus on changes in living standards. Five-year periods were chosen to remove short-term volatility while still keeping the indicator relevant to recent lived experience.

This model produces a benchmark growth rate for each country for each five-year period that we can then compare with their actual growth. The current 'Capitalists' are those economies that have grown more quickly than their benchmarks over the past five years and have also seen their living standards converge on those of the United States, which we regard as the benchmark economy.

This gap between actual and benchmark growth, which we refer to as the residual growth rate through this paper, can be thought of as the difference between actual trend labour productivity growth and the trend productivity growth one would have expected based on the country's level of development and its past productivity growth performance.

Measuring social dynamism

Table 1: ESG Index Construction

The second ESG or 'Social' arm has a more complicated methodology. When we looked at other 'global' ESG indices there were very few that were methodologically robust, that had very wide country coverage and where scores were comparable over an adequate length of time. We have therefore developed our own proprietary in-house global ESG index covering 135 countries over ten years that meets strict criteria for data quality, timeliness and breadth.

The details of how we did this are outlined in the methodological appendix but in summary four environmental, six social and six political and governance indicators were chosen on the basis of the rigour with which they are measured and compiled, the transparency of that methodological process, our judgement of how well they map to the UN sustainable development goals (SDGs), and the breadth of their coverage across counties and time (see Table 1). Our Emerging Market Debt team's EM-specific ESG index provided a starting point for our construction, adjusting and choosing additional indicators as appropriate given data availability and applicability across the development divide.

All indicators are normalised to allow for comparability with each other and across time, and each indicator receives an equal weight within its own E, S or G category. The E, S and G scores are then equally weighted to produce the overall ESG score for each year. This raw ESG index can be used as a screen for macro investors or bottom-up investors wanting to take account of country level ESG factors in their decision making. Currently, the index maps to many but not all of the SDGs; reflecting the challenges in finding high quality data for inclusion across all 17 SDGs. We intend to continue to build on the index to better reflect all of the SDGs over time.

Our aggregate ESG index is positively correlated with countries' level of economic development. That is both because some of these factors influence economic growth itself, but also because rising living standards tend to alter environmental, social and political priorities. Think about how China's environmental policies have changed as the country has grown richer. Or how many of the former Asian 'Tiger' economies transitioned to democracies only once they had crossed key economic developmental thresholds. Or even the relatively recent emphasis on improving gender equality in the West.

The next stage of our project was then to remove this 'development bias' from our raw ESG index by regressing it on the level of per capita GDP and establishing a development-adjusted ESG benchmark for country. We can then compare a country's actual ESG score, with its benchmark score to identify the extent to which each country has made (and is making) more or less than expected progress on sustainability goals given their level of development.

The final stage pulls the analysis from our 'Capitalist' growth and our 'Social' ESG benchmarking together. Countries that are performing better than both their economic and ESG benchmarks are deemed the 'Social Capitalists', with countries ranked according to their normalised distance from the benchmark across both dimensions. Beyond these top performers, our analysis also allows us to identify countries that outperform their benchmarks across either the 'Capitalist' dimension or the 'Social' dimension but not both, as well as the worst performers – which we call ' Social Laggards' – who are failing to meet either their economic or ESG benchmarks. A stylised four quadrant representation of our framework, with country examples is shown below (see Chart 2).

Chart 2: The four quadrants of 'Social Capitalism'

The four quadrants of ‘Social Capitalism’ *The growth residual is the difference between the observed 5 year annualised growth rate of per capita income and the rate fitted by our model.
**The ESG residual is the difference between the obserrved level of ESG index for a country and the level fitted by our model.

Source: Aberdeen Standard Investments, UN, Yale EPI, IDEA, V-Dem, ICRG, Happiness Report, Maddison Project (as of October 2018)

Social Capitalists: concentrated
in the developing world

Chapter 3

Chart 3: Social Capitalism across the world

The full summary output from our model of GDP dynamism and development-adjusted ESG performance can be seen in both map and table form (see Chart 3 and Appendix A). Of the 135 countries in our model, 46 are currently Social Capitalists according to our analysis (Quadrant 1). Social capitalists are found across the development spectrum but the majority are either middle income emerging economies or low income economies, particularly in Africa.

The United States, the United Kingdom, Ireland and Sweden are among the developed economies that make the grade, though in the United Kingdom's case the data mostly predate the Brexit referendum after which GDP growth has been muted against a backdrop of strong global growth. In what will be a surprise to many, Japan also just falls into this category having enjoyed stronger per capita growth between 2012 and 2017 than the US.

Japan is a good example of how demographic trends can distort assessments of relative economic performance. In absolute terms, Japan's average growth rate has been low but that is mainly because the population is shrinking – labour productivity performance has been strong. Contrast that with Australia where absolute growth has on average been stronger than Japan's but this has been entirely due to much stronger population growth, largely due to the country's immigration programme.

The strong performance of developing countries is a critical finding of our analysis. Although the past five years are generally seen as a period of disappointing global economic performance, it has still been a period of relatively strong economic convergence for the developing world. This is a good news story that deserves more recognition. Moreover, our results show that this strong economic performance need not come at the cost of poor ESG performance – progress along both dimensions is common.

Applying an equal weighting to the adjusted growth and ESG scores the three top ranked countries are Latvia, Lithuania and Georgia. If we concentrate on just the ESG dimension within the Social Capitalist quadrant, Costa Rica, Sweden and Portugal top the group. The fact that Sweden and Ireland rank so highly in both raw and adjusted terms on our ESG index is a testament to their focus on balanced, sustainable and inclusive growth. Focusing on just the growth dimension, Ivory Coast, Georgia and Democratic Republic of Congo top the rankings.

Intriguingly, all of the countries in Quadrant 2 – strong growth relative to the benchmark and convergence on US living standards, but weak ESG performance – are developing economies, particularly from central, south and east Asia. This group notably includes India and China, which even when adjusted for their level of development, have scope for them to improve their environmental, social and governance performance. The trajectory for China has been mostly positive across social and environmental indicators, excluding air quality, but political factors continue to drag as a result of the structure of China's political institutions and norms.

This is in stark contrast with Quadrant 3 – weak growth relative to the benchmark and divergence from US living standards, but strong ESG performance – where most are developed economies, predominantly in Europe, but also including Canada and Australia. This reflects many of these countries' post-financial crisis struggles, together with the decline in trend productivity growth observed across many countries.

Although these countries' progress appears better when seen through the wider ESG lens, the danger is that persistently weak economic performance will undermine public support for policies that promote more inclusive development while increasing support for economic policies that further undermine relative growth prospects.

Quadrant 4 is where the worst performing countries sit. many of these are in the Arabic world and war-torn regions; worst performers include Libya, Qatar and Yemen. Arabic countries tend to do poorly in our analysis because many are large commodity producers that have suffered from the large correction in commodity prices over past few years. This also makes the structure of their economies less environmentally friendly while their rigid social systems and political corruption and instability lower their ESG scores, particularly relative to their level of development.

Where are the 2011 Social Capitalists now?

Chart 4 - GDP drag for former Social Capitalists

Source: Aberdeen Standard Investments, UN, Yale EPI, IDEA, V-Dem, ICRG, CLD, Happiness Report, Maddison Project (as of October 2018)

In 2017, the model identified 46 Social Capitalist countries; down from 52 countries in 2011 (the benchmark economic growth period for the 2011 rankings is 2006-2011). This change has been mostly due to the change in global growth dynamics across the two periods. The period between 2006 and 2011 was obviously dominated by the financial crisis, which hit the US economy especially hard. Because the US is our benchmark economy, the bar for being classified as a social capitalist was lower in the earlier period.

Moreover, some of the economies that performed relatively well during the crisis years – namely Australia, Brazil and some European countries – have performed comparatively poorly over the past five years, partly because the commodity super-cycle came to an end but also because of the imbalances that have built up over the intervening years. Indeed, the majority of the countries that lost their 'Social Capitalist' status in 2017 moved into the third quadrant where per capita growth was below their benchmark but their ESG performance was still above (see Chart 4).

Nevertheless, 'Social Capitalism' has remained quite persistent with 31 – mostly developing – countries retaining their status in both periods. This includes our highest performing Social Capitalists Latvia, Lithuania and Georgia.


Growth in focus: a period of
sustained catch-up growth

Chapter 4

Though the focus of our project is on the integration of economic growth and ESG analysis to assess national performance, there is still value in focusing on growth dynamics alone, particularly for those invested in funds where narrower economic and earnings benchmarks are the more important driver of performance.

The most striking result from our growth analysis is the very high proportion of countries that exceeded their growth benchmarks, while also converging on US living standards, in both the 2006 to 2011 and 2012 to 2017 periods, despite the very different global cyclical dynamics across the two periods. Indeed, almost 40% of the 135 countries in our indices outperformed these benchmarks in both periods. Focusing on just the most recent five-year period, 85 out of the 135 countries (just over 62% of the total) met both of our growth 'dynamism' criteria, while 101 countries had positive growth residuals.

Our methodologic approach is not a classic cross-country growth regression. That is because it only controls for the level of economic development at the start of the period and time invariant country factors, rather than also including the wide range of other time varying economic, institutional, policy and geographic variables that influence long-term growth. Nevertheless, the results are consistent with recent academic evidence that the past 20 years have seen an enormous improvement in developing countries' relative growth and living standards.

Why has such a transformation in absolute and relative growth outcomes gone relatively unheralded? One reason is that international media and investor attention tends to focus more heavily on what is happening in the large developed economies where the bulk of liquid investable assets reside and shape geopolitical narratives. And in the developed economies the past decade has mostly been a struggle.

While those struggles are important, the disproportionate focus on developed economies and a small number of large developing economies creates opportunities for savvy investors. Among the countries already in emerging market equity and bond benchmarks, persistently strong economic performers are likely to generate stronger risk-adjusted returns over the longer term. Our own preliminary analysis suggests that there is a positive correlation between trend per capita growth and equity returns, a relationship we intend to explore more rigorously in future work.

Meanwhile, relatively poor developing economies, which are not currently in those investment benchmarks but are strong economic performers, may be the countries that move into those benchmarks in the years to come. Examples of countries not currently in the JP Morgan GBI-EM Global Diversified Index for Local Markets but have been persistently strong economic performers over the past decade include Bulgaria, Panama, Sri Lanka, Vietnam and Ghana.

Changing growth dispersion

Looking at the distribution of raw average per capita growth rates over the 30 years of our study there has been a gradual rightward (positive) shift in the mode of the distribution, from between 0-2% in the period from 1988 to 1993 to between 2-4% in the period between 2012 and 2017. Moreover, the dispersion of growth rates has declined with fewer economies currently in the tails of the distribution. Focusing on the growth residuals alone, the rightward drift in the distribution over time is even more pronounced (see Chart 5). This reflects the fact that average per capita growth has been stronger in most countries than would otherwise have been anticipated on the basis of their average growth over the previous 30 years and living standards alone.

Chart 5: The number of countries exceeding their growth benchmarks has increased over time

The residuals are the percentage point (ppt) difference between a country's observed five-year annualised real per capita growth rate and the rate estimated by our model. The time periods shown here are 1988-93, 2000-05 and 2012-17.

Source: Aberdeen Standard Investments, Maddison Project (as of October 2018)

High, middle, low; which income category is most dynamic?

Another way to analyse the data is to evenly split countries into high, middle and low per capita income categories, examining the proportion of countries that have both outperformed their benchmarks and experienced stronger per capita growth than the US (see Chart 6). This gives us the distribution of dynamic countries across the different income categories.

What is most interesting to note here is the large increase over time in the proportion of low and middle income countries meeting both our criteria for dynamism. In contrast, the 2000-2005 period was the high watermark for growth performance in the high-income countries. Since then only half have managed to outperform their own and US benchmarks - partly due to the overhang of the financial crisis.

Chart 6: Middle and low income countries have become more 'dynamic' over time

% of countries in the high, middle and low income categories with a positive growth residual and income growth higher than that of the US in previous 5 years.
*GDP per capita in measured in purchasing power parity terms

Source: Aberdeen Standard Investments, Maddison Project (as of October 2018)

Developing Asia and Europe stand out

Focusing on the 28 countries that have persistently outperformed their own benchmarks by a large margin (2ppts or more) and whose per capita incomes have grown faster than that of the US, we see that the vast majority are developing countries (see Chart 7).

Regionally, the list is fairly diverse, with 11 countries from developing Asia, 10 from developing Europe, and five from developing Africa. However, only one country from South America (Peru) and one country from Central America (Panama) are represented, reflecting those regions' substantial growth challenges.

Chart 7: 28 countries outperformed their benchmarks by at least 2ppts and converged on US living standards in both 2006-11 and 2012-17

Source: Aberdeen Standard Investments, Maddison Project (as of October 2018)

The maintenance of such strong per capita growth rates can make a very large difference to living standards over time. For example, if India were to record the same per capita growth over the next decade as it did over the previous decade its level of per capita GDP relative to the US would rise from 7% in 2007 to 20% in 2027. Similar transformations would take place in other fast growing economies (see Table 2). This analysis should not be interpreted as a forecast as there are many factors that could alter countries' growth trajectories over the next decade, but it does demonstrate the compounding benefits of persistently strong growth.

On the other end of the development spectrum, mature, developed economies have had varied experiences with growth. Many peripheral European countries like Italy, Spain, Greece and even Finland have undershot their benchmarks in both periods while observed growth per capita growth in Italy has actually declined over the full decade. Little wonder that these countries have been the scene of surging political populism.

Table 2: Persistently strong growth makes a big difference to relative living standards over time

* 2027 values for GDP per capita were calculated by projecting the average per capita growth recorded between 2007 and 2017 over the 2017-2027 period

The Netherlands, Germany and France have managed to outperform their own-country benchmarks over the past decade, though in per capita terms they did not grow faster than the US in the most recent five-year period.

Ireland is the one Eurozone economy deeply affected by the crisis that has managed to turn its economic fortunes around, largely because it was the most liberal of the peripheral economies when the crisis hit. While we use GDP in this model, which will reflect international firms that repatriate profits abroad, Ireland's per capita national income performance excluding potential tax distortions has also been very strong in recent years.

Outside of the Eurozone, the UK outperformed its benchmark in the most recent five-year period, though that was largely due to the very strong growth the economy enjoyed prior to the Brexit referendum. Per capita growth has slowed significantly over the past two years and is likely to remain subdued at least until Brexit uncertainty is resolved and the government reignites a reform agenda. Meanwhile, two economies that had relatively mild crises – Australia and Canada – have seen their relative performances slip over the past five years, reflecting the end of the commodity boom and their growing debt frailties.


ESG in Focus: Greater focus on
the environment needed

Chapter 5

With the advent of the Sustainable Development Goals (SDGs) set by the United Nations in 2015, governments across developed and emerging markets have a tangible set of goals to address sustainability and fairness in their societies. As investors, we already have the opportunity to support these efforts at the firm level, but measuring success at the macro level has consistently posed a challenge due to poor data quality and issues of transparency. Our global ESG index covering 135 countries across 17 indicators aligned to the SDGs provides an innovative lens to assess progress, taking our analysis beyond an assessment of growth dynamism to provide an assessment of social dynamism.

The raw index scores and rankings give us an indication of how countries are performing in the face of the environmental, social and political & governance challenges set by the UN SDGs. However, it is also useful to assess the changes in performance over time and understand which countries are making the greatest progress towards meetings the SDGs. A final innovative use of the index involves adjusting for development levels, which provides a vastly different assessment of progress particularly in emerging markets as the development bias in ESG scoring is stripped out.

Chart 8: Addressing climate change the major challenge for top ESG performers

Source: Aberdeen Standard Investments, UN, Yale EPI, IDEA, V-Dem, ICRG, CLD, Happiness Report (as of October 2018)

There are no surprises regarding which countries top the raw ESG index, with Norway in first place and other European countries monopolising most of the top quartile of the index. However, even among these strong aggregate performers, there is room for improvement under some indicators, especially within the environmental category (see Chart 8).

Air quality, which measures particulates in the air, is the factor dragging most on performance for many of these countries, though carbon emissions intensity, which reflects a population-adjusted measure of CO2, is also high in these countries. This reflects the industrialised nature of these countries and the substantial challenges facing policymakers to address them in accordance with their international obligations under the Paris Agreement. Finland, France and the Netherlands have seen improvements in their air quality since 2011 but Norway, Denmark, Switzerland, Australia, Spain and Portugal have actually worsened during the period.

Table 3: Major investible markets face environmental and political challenges

Source: Aberdeen Standard Investments, UN, Yale EPI, IDEA, V-Dem, ICRG, CLD, Happiness Report, Maddison Project (as of October 2018)

The environmental challenge extends across most of the largest investible markets, with air quality a clear weakness (see Table 3). Indeed, for the US, Germany, France and India, air quality accounted for the weakest rankings for these countries. The UK did record positive improvements in its air quality ranking rising the most over the period while CO2 emissions improved in Italy.

Interestingly, and in contrast to the trends we observed in smaller developing economies, elements of political and governance have been the biggest drags on performance in recent years. Social group equality and civil society organisation (CSO) participation were either the least improved or the worst indicators across our whole sample of major markets. Against a backdrop of populist politics shaped in part by the discontents of globalisation, this degradation of equality and representation is striking and concerning particularly given the UN focus on 'reduction of inequalities' as one of their sustainable development goals.

For the BRICs, improvements in the expected years of schooling indicator resulted in the strongest rank improvements for all but India. China ranks 107th on the final index, having been three places lower in 2011. China has improved across the majority of its social and environmental indicators over the period but has regressed on all political and governance indicators with the exception of absence of corruption, which has seen a slight improvement and unchanged bottom ranking for the free and fair election indicator due to the one party system.

Widespread ESG improvement over time

Chart 9: Developing countries lead on greatest uptick in performance since 2011

Source: Aberdeen Standard Investments, UN, Yale EPI, IDEA, V-Dem, ICRG, CLD, Happiness Report (as of October 2018)

Looking at how the index scores have evolved over time more broadly, 85 countries have seen their aggregate ESG score improve since 2011. The countries showing the largest improvements are all developing economies, with Honduras making the greatest improvement in both level and rank in the ESG index since 2011 (see Chart 9). This was thanks to improvements in reports of life satisfaction, followed closely by access to justice and freedom of expression indicators following a coup and move towards democracy in recent years.

Adjusting for development can lead to large shifts in rankings

It is well understood that raw ESG scores and country rankings are positively correlated with countries' per capita income. That is both because economic development itself tends to influence environmental, social and political priorities and capacity, but also because those choices themselves can influence economic development. Given this relationship, country rankings based on raw ESG scores, while useful, can obscure our ability to compare ESG performance across countries at different stages of development.

Chart 10: Adjusting for development can lead to large ESG ranking differences

Source: Aberdeen Standard Investments, UN, Yale EPI, IDEA, V-Dem, ICRG, Happiness Report, Maddison Project (as of October 2018)

Source: Aberdeen Standard Investments, UN, Yale EDI, IDEA, V-Dem, ICRG, Happiness Report, Maddison Project (as of October 2018). Civil Liberties Dataset aka CLD

Indeed, when we control for the level of development, country rankings change quite significantly. Chart 11 shows the top and bottom 20 ranked countries after we make the development adjustment to our raw ESG scores. Although high income countries dominate the top of the development-adjusted rankings, a number of poorer countries also emerge as strong performers, including Costa Rica, Malawi, Jamaica, Senegal, Niger, Burkina Faso, and Rwanda. These countries' strong ESG performance relative to other countries at similar stages of development may provide them with more sustainable growth opportunities as they continue to develop.

In contrast, countries that tend to do poorly after adjusting the ESG scores for development are found in the Middle East and North Africa and Asia. Most of these are either non-democratic, commodity intensive economies, or both - features that will naturally act as a drag on ESG performance but have been less restrictive for their economic development.

Table 4: Top performers by income category

Source: Aberdeen Standard Investments, UN, Yale EPI, IDEA, V-Dem, ICRG, CLD, Happiness Report, Maddison Project (as of October 2018)

Another way to compare countries is to identify the top performers in terms of raw ESG scores for each of the developmental buckets we drew on in our growth analysis (see Table 4). Among high income countries, there is a significant degree of overlap in raw ESG rankings and development-adjusted outperformance with nine of the ten top ESG performers also making the top ten in development-adjusted terms.

In the middle income space, we see a similar overlap, though with some more variation. Costa Rica and Jamaica stand out for their performance across most of the sub-indices and their relative outperformance in development-adjusted terms. However, as we move down the income distribution to low income categories, countries topping the raw index are much less likely to be outperforming than in other income categories, with the exception of Senegal and Rwanda.

What is also striking is how ranking variation across the E, S & G sub-indices depends on per-capita income levels. In the high income group, countries tend to rank in the top ten for at least two if not all three of the sub-indices. This relationship is weaker among the top performers in the middle income group although there is a degree of co-ordination across environmental and governance scores. For the low income category, countries are most likely to appear in only one of the sub-indices.

This is an interesting finding, as it suggests that lower income countries showing more variation across the three components of the ESG index than higher income countries, where performance is more consistent. Further work is required to explore the nature of this relationship but these initial findings suggest that ESG policy and outcome convergence increases as income rises.



Our joint model of growth and ESG dynamism sheds light on which countries are persistently making the most progress on both narrow economic and sustainability criteria. Many of these countries – particularly in Africa and Eastern Europe - fly underneath the radar in traditional macroeconomic analysis.

Focusing on growth dynamism alone, the past decade has seen enormous economic progress amongst developing countries, in contrast with the generally weak performance of the developed economies over this period. The latter should not be ignored because of the way it is shaping national politics and the broader geopolitical environment. But the fact that so many developing countries are closing the income gap should be celebrated more; with the role that globalisation has played in the process often underappreciated.

Unsurprisingly, the highest ranked countries in our raw ESG index are in the developed world. However, even these face significant challenges in improving air quality, tackling climate change and reducing inequality. When we adjust our raw ESG index for countries' level of development, high-income countries also tend to dominate the top of the rankings, but our analysis also shows that a number of predominantly sub-Saharan African countries are doing well compared with their low-income peers. Meanwhile, the worst ESG performers in development-adjusted terms tend to be concentrated in North Africa, the Middle East and parts of Asia.

Identifying best practice policy and institutions that can be feasibly imitated elsewhere is something we will address in future work. Future work will also explore the extent to which our ESG index and its components contain 'causal' information about countries' long-term growth prospects, as well as how growth dynamics influence ESG choices. We also intend to more thoroughly investigate the relationship between economic growth dynamics, ESG factors and asset returns.

As data in this space continues to improve, we will review and refine our data choices to ensure the highest quality and most useful index closely mapped to the sustainable development goals. For our next update, we intend to add a labour market indicator that must meet our criteria for high quality, transparent and timely data.

Appendix A: Metatable of country rankings and performance

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