Stepping inside the Model: 'Strong Sustainability' means Natural Capital Stands Apart
Candriam has been analyzing and scoring Sovereign Sustainability since 2009. Our third version of our model moves us beyond the traditional four-capital-pillar framework by recognizing that Natural Capital is both finite, and non-substitutable for Human, Social, or Economic Capital.
We believe our scores, constructed from 470 Factors for each country, are even more useful for the insights the components offer on individual topics in need of further study. The model is fed by a rich database, aiding our understanding of complex issues. We use both the data and the insights in our Candriam investment processes.
The increased weighting of natural capital to our overall country score affects country rankings versus our previous models – and versus the way other models might rank nations.
For our full philosophy and approach to Sovereign Sustainability, download our paper, 'Natural Capital vs the Nature of Capital'.
Note: This analysis was finalized at the beginning of September, 2020 -- two months before the US elections. Since then we have seen the FBI foil a plot to kidnap Michigan Governor Gretchen Whitmer,1 as well as a number of attempts to organize violent resistance by pro-Trump extremists.2 The election victory for the Democratic candidate, Joe Biden, was recognized by the international community, yet the incumbent administration refused to concede defeat and attempted to undermine the legitimacy of the election process. Although numerous lawsuits alleging election fraud were thrown out by courts, government agencies blocked the transition process to the new administration.3 Changes in the Pentagon leadership4 by the lame-duck administration as well as unprecedented interference in the elections by the US Department of Justice5 were of concern. The January, 2021 insurrection by Trump supporters attempting to block confirmation of the elections results remains in the US courts. Attempts to disenfranchise voters continue on state level.6
Figure 1: Sustainability Score and the four Pillars
Natural Capital score x (average of Human + Social + Economic Capital scores)
Example above is for Illustration purposes only. Actual taxonomy may vary in different model versions.
Source: Candriam
Focus: Rule of Law
Within the Social Capital pillar of our model, one of the 131 Issues we monitor is the Rule of Law. We believe the trends demonstrated by our model foreshadowed the drama in the US. What will this mean in a world of interconnected nations?
The rule of law is essential for social development. Across the globe, certain leaders have used the current pandemic to grab power. A prime example has been Hungary, which passed a law in March 2020 suspending some existing laws and allowing the government to effectively rule by decree.7
Even a year into the pandemic, it is too early to determine its full effect on the rule of law globally. We believe our framework can help evaluate the existing conditions and, importantly, the future trends. In places already experiencing a deteriorating rule of law, opportunists would find it easier to use the pandemic to further alter society, with potential effects on other nations as well. In Hungary, the situation is localized. Nations with greater influence on the global community merit close monitoring.
In the run-up to the 2020 Presidential elections, with the domestic situation and social cohesion deteriorating, our model suggested the probability of violence was not insignificant.
One such example is the United States. Our scores for the US show several years of deterioration in the rule of law (Figure 2), with the downward trend accelerating from 2017 onward.
One of the most prominent of several reasons has to be the erosion of the political independence of the US Department of Justice. During the previous administration, high turnover at the helm of the Department, as well as at institutions such as the FBI, was accompanied by accusations of political motivations, and the appointment of a Special Counsel immediately after the controversial dismissal of the Director of the FBI in 2017. Subsequently then-President Trump granted a number of pardons to those in his immediate social and political circle – something that one might expect from much less developed countries. In a healthy democracy, checks and balances ensure that rule of law cannot stray from established practice for too long. It is illustrative to examine the historical trend of another component of Social Capital – Democracy and Political Stability (Figure 3).
Historically, the US had been scoring around the average for developed markets on Democracy and Political stability, but after 2018 it appears that the usual checks and balances within the system have not been as effective. Congressional oversight powers were sharply diminished during the Trump administration, through successful orders to officials to defy subpoenas, in stark contrast to established precedent. In 2020 an Appeals Court ruled that it could not enforce Congressional subpoenas, jeopardizing the system of checks and balances.8 Another example of this erosion has been the number of Inspectors General dismissed during investigations into the propriety of the actions of Administration officials.9
The combination placed the United States in a previously unknown position at the start of the global pandemic – with democratic institutions in decline, and the rule of law approaching the global average, instead of the developed markets average.
The future of the United States is critical to the global community in a number of ways. Most importantly, the natural environment is both a common good and the one finite capital pillar among the four. It is not sustainable to have a 'free rider' of such size as the United States.
Later developments, beyond the scope of then-available model data, included service reductions at the US Postal Service, potentially jeopardizing the right to vote of vulnerable people and minorities.10 These did not bode well for the US, and by extension for emerging economies, where the US has been historically very active in promoting the rule of law, democracy, and the fight against corruption.
Violations of laws such as the Hatch Act by the Trump administration11 are something that the global community expects from less developed nations, but began to expect from the US. In the run-up to the 2020 Presidential elections, with the domestic situation and social cohesion deteriorating, our model suggested the probability of violence was not insignificant, as stated in our November White paper.
The future of the United States is critical to the global community in a variety of ways. Most importantly, the natural environment is both a common good and the one finite capital pillar among the four. It is not sustainable to have a 'free rider' of such size as the United States.
Withdrawing from international organizations such as the WHO, repudiating international agreements such as the 2016 Paris Climate Change Agreement, and the Iran nuclear deal, threatening the existence of NATO, were examples of the threat to the international community. The new Biden administration in the United States has begun with ambitious goals to reverse many of the policies of the Trump era. Its success, and the restored confidence of the international community, are not yet certain.
If we are to halt and ultimately reverse climate change, this cannot be done without the US as an active participant.
Figure 2 Rule of Law -- History and Trend
2011 to 2020
Source: Candriam
*Sustainability score history shows static scroes, whereas ranking is done based on 5Y forward projections.
Figure 3 Democracy and Political Stability -- History and Trend
2011 to 2020
Source: Candriam
Figure 4 Rule of Law Sustainability Score
Source: Candriam
1 The Washington Post. FBI charges six who it says plotted to kidnap Michigan Gov. Gretchen Whitmer, as seven more who wanted to ignite civil war face state charges. 9 October 2020. https://www.washingtonpost.com/national-security/michigan-governor-kidnap-plot/2020/10/08/0032e206-0980-11eb-9be6-cf25fb429f1a_story.html, accessed 18 November 2020.
2 Reuters. 'Worrying calls for violence' prompt Facebook to remove rapidly growing pro- Trump group. 5 November 2020. https://www.reuters.com/article/us-usa-election- socialmedia-idUSKBN27L24G, accessed 18 November 2020.
3 Forbes. The GSA Head Who Blocks Transition To Biden Presidency Is Partisan And Not Independent. 10 November 2020. https://www.forbes.com/sites/charlestiefer/2020/11/10/the-gsa-head-who-blocks-transition-to-biden-presidency-is-partisan-and-not-independent/?sh=1cfdfe1f5e52, accessed 18 November 2020.
4 Cable News Network. Trump administration removes senior defense officials and installs loyalists, triggering alarm at Pentagon. 13 November 2020. https://edition.cnn.com/2020/11/10/politics/pentagon-policy-official-resigns/index.html, accessed 18
November 2020.
5 Politico. Barr OK for election-fraud investigations roils Justice Department. 9 November 2020. https://www.politico.com/news/2020/11/09/barr-memo-authorizes-doj-to-open-election-fraud-investigations-435622, accessed 18 November 2020.
6 The New York Times. Georgia G.O.P. Passes Major Law to Limit Voting Amid Nationwide Push. 25 March 2021. https://www.nytimes.com/2021/03/25/us/politics/georgia-voting-law-republicans.html, accessed 29 March, 2021.
7 Politico. Hungary’s Viktor Orbán wins vote to rule by decree. 30 March 2020. https://www.politico.eu/article/hungary-viktor-orban-rule-by-decree/, accessed 18 November 2020.
8 CBS News. Appeals court rules it can't enforce congressional subpoena of former White House counsel. 1 September 2020. https://www.cbsnews.com/news/don-mcgahn-white-house-counsel-congressional-subpoena-appeals-court/, accessed 18 November, 2020. 9 CBS News. The internal watchdogs Trump has fired or replaced. 19 May 2020. https:// www.cbsnews.com/news/trump-inspectors-general-internal-watchdogs-fired-list/, accessed 18 November 2020.
10 Mother Jones. A Federal Judge Says USPS Delays Were an “Intentional Effort” to Undermine Fair Elections. 18 September 2020. https://www.motherjones.com/politics/2020/09/federal-judge-says-usps-delays-were-intentional-effort-to-undermine-fair-elections/, accessed 18 November 2020.
11 National Public Radio. Trump Shatters Ethics Norms By Making Official Acts Paroof of GOP Convention. 26 August 2020. https://www.npr.org/2020/08/26/906228532/trump-shatters-ethics-norms-by-making-official-acts-part-of-rnc-broadcast?t=1600698533833&t=1605717442133, accessed 18 November 2020.