The Sustainable Development Conundrum

In this article we examine two factors: (1) Gender Equality and (2) Environmental, Social and Governance (ESG). We explore how gender equality may affect post pandemic recovery in developing markets, the impact of the pandemic on developing markets’ commitment to ESG and the risks ESG poses to developing markets in the future. We also touch upon sovereign credit ratings and see how these may be influenced by the aforementioned factors.

Gender equality is the state of equal ease of access to resources and opportunities regardless of gender. One important way this could be achieved is more women in the workforce – resulting in a higher number of economically active people, increasing output, ceteris paribus. This leads to higher inflows of earnings which, when pumped back into the economy, support consumption, increase the tax base and overall social welfare.

A 2020 study by UN Women shows that the pandemic has largely troubled sectors in which there is an overrepresentation of women, such as accommodation, retail trade and tourism. Worrying that this, if unaddressed, is likely to aggravate gender gaps in the near future. A 2018 report by the World Bank estimated a $160 trillion loss in wealth due to earnings gaps between women and men.

Governments have responded to this issue by targeting policies at sectors where women form a larger part of the workforce. For example, India launched a support scheme targeting SMEs and the healthcare sector. Bank of Russia facilitated $6.3B to help fund SMEs. A Moody’s report from March expects states to continue such schemes, mainly cash transfers, training, and credit lines for women to ensure income disparities don’t worsen in the post-pandemic era. It also argues that more than recovery policies, there are social policies regarding women’s training which are likely to make a larger, long-lasting impact and explores examples of Latin American countries running programs for women.

For the ethical investor, check out gender bonds.

Coming to ESG

Most of the severely affected people due to the pandemic reside in developing countries – around 6.8B, close to 85 percent of the world’s population. These countries are the ones at greatest risk from ESG factors, be it climate change, civil disorder and/or impotent governments.

Companies in developing markets seek to work towards UN SDGs and there are others which are managed in a way to solve societal and environmental problems. They contribute to society, employ sustainable practices, and generate financial returns. Covid-19 has pinned down the need of investing in these markets as there is increasing awareness of ESG issues. This puts forward a convincing case for impact investing in these markets in the times to come. There’s no hiding from the fact that emerging markets and their volatility pose a greater risk to investors, but as the old saying goes; high risk – high reward.

Featuring: China’s Belt and Road Initiative (BRI)

China’s global infrastructure development and investment strategy, BRI, is now active in around 140 countries, most of which are classified developing. This is not only achieving China’s geopolitical objectives of increasing economic influence but also helping these markets reduce infrastructure gaps over the past seven years. The pandemic has heightened external vulnerabilities across emerging markets, but this poses minimal risk to Chinese investors, argues Lillian Li from Moody’s Investor Service, Shanghai. Across the nations under the BRI, GDP is expected to contract by 3.8 per cent in 2021. Credit stress remains pronounced as these markets confront liquidity constraints, revenue shortfalls and in some cases increased default risks. This is due to the fact that most of these countries are small and lack diversification, i.e., are usually concentrated in one commodity or one sect of industry such as tourism and rely somewhat heavily on remittances from workers overseas.

The pandemic has seen a reduction in new investment flows, but this is no sign of the BRI pulling back. This is because of three main reasons. First, Chinese institutions have invested a huge amount of financial and political capital. Second, objectives of expanding influence in emerging markets are more prominent now as China’s relations with some advanced economies have soured. Lastly, trade regionalization which was partly ramped up by the pandemic will continue to support the initiative as China continues to stand out as one of the major export destinations for raw materials and other products.

Interesting to note that the BRI is ‘greening’. In the first half of this year, renewables accounted for 58% of BRI projects, a threefold increase from 18% in 2014 during the early stages of the initiative. One explanation is that Covid-19 led to a rise in demand for ESG infrastructure and digital connectivity, providing new opportunities for Chinese investors.

For the future impact investor, check out green bonds.

Sovereign credit ratings

A sovereign credit rating is an independent assessment of the creditworthiness of a country or sovereign institution. It can give investors insights into the level of risk associated with investing in the debt of a particular country, including any political risk.

It is worthwhile to explore the effect ESG factors have on these ratings. A Moody’s report from January tells us that ESG factors usually bring down the sovereign credit ratings. Each component would further explain why: Environmental risk exposure is relatively lesser in advanced economies when compared to emerging markets, possibly due to climate risk and carbon transitions, hence affecting the latter’s ratings negatively. Social risks come into play when we consider factors such as inequality, safety, education and many more. Clearly, developing markets which lack behind in all these aspects have their ratings negatively affected. Lastly, governance – which reflects policy effectiveness and quality of institutions, is where the two types really diverge. For advanced economies, this factor strengthens their ratings whereas the polar opposite occurs for emerging markets.

A final word: Awareness on the importance of sustainability has been around for a long time and continues to grow rapidly, but real change occurs when economic agents consider these when making decisions.

This article was written by Krishna Karthik Kosoor, currently a student at the London School of Economics and Political Science, pursuing BSc Finance.

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