With more than $40 trillion of funds under sustainable management, Environmental, Social and Governance (ESG) investing is no longer niche investing, having finally struck a chord with mainstream finance. Without doubt, most investors in this realm have an authentic interest in promoting a more sustainable and equitable future. But getting sustainability right is a complicated business. 

A thorough debate about sustainable growth can quickly lead into a discussion about development finance, long-term economic growth, natural resources, institutions, and politics among other issues. It is not too far-fetched to compare the multitude of factors and level of coordination that go into building a sustainable ESG investment framework to conducting an orchestra of classical musicians to perform a full symphony.

Financial markets embracing a more sustainable future is music to the ears of those working in international development. With a history in the sustainable finance sphere spanning some 70 years, the World Bank Group has been a key protagonist in helping the financial sector embrace a more sustainable future. The current pandemic is seeing a renewed global push to build back better, more equitable and sustainable economies. At the dawn of this hopeful recovery, it also makes sense to assess how ESG investing can further this trend. Reading a printed music score enables a better understanding of a musical performance. In that spirit, we asked seven leading sovereign ESG data and score providers—FTSE Russell/Beyond Ratings, IIS, MSCI, RepRisk, Robeco, Sustainalytics, and V.E—for methodology and background documents to better understand their sovereign ESG scoring systems.

Two recent papers, Demystifying Sovereign ESG and A New Dawn—Rethinking Sovereign ESG, are the results of this effort. They describe the current state of sovereign ESG investing and provide clarity on what “ESG as input” means versus “ESG as output”, and how it relates to “values” versus “value” investing or purpose versus purpose-neutral investing. Most importantly, they reveal that the current sovereign ESG framework faces structural challenges that must be addressed. 

Sovereign ESG providers, who have laid the foundation for the operationalization of ESG investing in sovereign fixed income markets, generally agree on what constitutes a good sovereign performance for Governance and Social issues. But there is considerably less agreement on what constitutes a good score on the Environment pillar. This is due to disagreements on what “good” performance is on a conceptual level, but also due to data gaps, out-of-date statistics, and heterogeneous reporting standards, which often force providers to fill in and estimate missing values. Fortunately, recent advances in geospatial technologies, as well as pressure for more standardized national reporting and the newest version of the Changing Wealth of Nations data show promise for mending these gaps.

While agreement among ESG providers on Governance and Social scores may appear desirable at first glance, further investigation reveals that this may not be desirable after all. This is because of an ingrained income bias (IIB). About 90 percent of sovereign ESG scores can be explained by a country’s national income.[…]