‘Social Capitalism’: A new measure of national success

Stephanie Kelly

The research, entitled Social Capitalism: Taking a wider view of national progress, presents a new way of comparing countries’ economic and environmental, social and governance (ESG) performance.

Utilising economic data and ESG scores for 135 countries, ASI has 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 are prominent candidates to display sustainable economic development leadership over the next 20 years. This makes them exciting areas for investment.  

As a long-term, responsible investor, ASI felt the mainstream macroeconomic growth analysis serving the investment community was too narrow in scope, focused too much on short-term growth indicators and tended to fixate on large economies like the United States, Eurozone and China.

The study redresses such limitations by developing a new indicator of national progress that integrates ESG performance, aligned with the United Nations Sustainable Development Goals, with measures of longer-term economic performance and removes the development bias that plagues most other approaches to ranking and comparing countries.

Jeremy Lawson, head of the ASI Research Institute, said: “The most successful societies blend strong economies that have robust growth 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 ESG goals.

“Our results are evidence of 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 but in many cases this has been accompanied by strong progress on sustainable development objectives as well. This shows that the supposed trade-off between strong economies and strong societies to be a false one.”

The research also highlights the benefits of globalisation 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. The stronger absolute and relative economic growth is helping to provide the resources to support the ESG goals that will make future growth more sustainable.

Expanding, Stephanie Kelly, senior political economist, Aberdeen Standard Investments, said: “The vast majority of the ‘Social Capitalist’ countries that we have identified are developing economies that we believe will generate both global economic and sustainable development leadership over the next 20 years. I firmly believe that for developing countries to sustain this strong growth performance, relative both to the developed economies and their own past performance, continued domestic economic and institutional reforms will be necessary, especially because the strong tailwind from globalisation can no longer be taken for granted.

“Our research has revealed that 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 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 and damage the prospects for further catch-up growth in developing countries.”

Integrating ESG factors into mainstream investment processes across all asset classes and geographies is an increasingly important way to identify potential investment risk. Something that is often still overlooked. The research demonstrates that strong economic performance need not come at the expense of environmental, social and political goals.

This is more than an academic study. The new comprehensive toolkit can be used by investors to better understand the investment landscape and assist with asset allocation and investment decisions. Policymakers can also use the indicator, underpinned by new propriotary research, as a benchmark for assessing absolute and relative national performance.