ESG: Biden's Summit for Democracy and the challenge for ethical EM investors

  • Biden hosts the "Summit for Democracy" in December, applying another layer of human rights varnish on US foreign policy

  • We look at the countries on the invite list, published this week, in terms of third-party measures of their democracy

  • Most investors don't care about democracy; ESG ones who market that they do should treat these metrics with caution

ESG: Biden's Summit for Democracy and the challenge for ethical EM investors
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
24 November 2021
Published by

US President Biden this week invited over a hundred countries to his Summit for Democracy, which is being held on 9-10 December.

We review the democratic credentials of the main emerging countries invited and revisit the implications for investors in EM of the morality-laden rhetoric of US foreign policy under Biden.

EM investment in Biden's moral worldview

The US administration under President Biden couches much of its foreign policy in the rhetoric of human rights and democracy. This raises practical and ethical questions for investors in emerging markets.

  • Do negative remarks by the US administration on a country's human rights record and its democratic credentials signal a higher risk of trade and investment restrictions and, in the extreme case, sanctions? Clearly, the answer is yes.

  • Should an ESG-minded investor's view of whether a country meets its ethical criteria be informed by the publicly stated opinion and actions of the US administration, or indeed any third party? Here, the answer should be no.

Most investors demonstrably do not care much about democracy. Massive foreign inflows into China publicly traded equity and debt, despite this year's setbacks in the fundamental investment case, is evidence of this. Saudi Arabia, after its inclusion in the benchmark MSCI EM equity index in 2018 or Vietnam, the foreign consensus favourite small emerging market, are other examples. Indeed, at times, investors may wish for a little less democracy, as many veterans of LatAm might testify to.

In the pure, amoral pursuit of returns there is arguably no more reason why investors should care about human rights and democracy any more than they should about climate change factors, unless there is a disruptive change coming in the time horizon on which they are rewarded.

However, if institutional funds are marketed under the ESG banner, then ethics enter into the investment case. And if those funds are managed sincerely, then ethical standards should be applied to country selection as much as country selection.

US President Biden is hosting the Summit for Democracy on 9-10 December to "galvanize commitments and initiatives across three principal themes: defending against authoritarianism, fighting corruption, and promoting respect for human rights".

This week, the list of over 100 invited country participants was published. The original stated reason for issuing invitations to some countries but not others was to reach out to "a regionally diverse set of well-established and younger democracies whose progress and commitments will advance a more just and peaceful world".

Below, we screen the emerging markets in our universe on the basis of whether they are invited to Biden's summit, third-party scores of how democratic are their political systems, and how much more or less democratic they have become over the past decade on one of these third-party measures.

Democracy and freedom in the emerging markets

Change in EIU democracy score in EM (from 2010-20, %)

Including or eliminating countries on the basis of these third-party indices truly is no more valid an approach than taking the Biden administration's rhetoric as gospel. ESG-minded investors should treat those third-party metrics with caution.

  • There is a very high degree of subjectivity in any assessment of a country's current democratic credentials, eg the EIU scores Malaysia much closer to the US than Freedom House or V-Dem, and the pace at which those credentials are improving or eroding, eg has Bangladesh really become more democratic over the past decade as the EIU's index implies?

  • These scores can change very quickly and recent democratic gains, as judged by these third-parties, can be very fragile, eg the two biggest democratic gainers of the past decade, 2010 to 2020, in the EIU index are Myanmar and Tunisia, both of which have suffered major setbacks this year.

Subjectivity and lack of standardisation plague most of the ESG asset class but that reinforces why funds that market themselves as ethical should be pressed much more on how they justify including some but not other countries in their investable universe.

Deferring how the investable universe of countries is defined for ethical, ESG-minded investors to third parties is no less an abdication of responsibility than when passive funds leave it to third parties, such as MSCI or FTSE in equity or JPM in sovereign debt, to determine which countries to include.

Country ESG related reading and data

ESG needs to focus on countries, not just companies, October 2021


The success of COP26 depends on China and the US: the rest are onlookers, October 2021

The 'E' in ESG: 8 charts showing greenhouse gas emissions in emerging markets, October 2021

The 'E' in ESG: 4 charts on plastic waste in emerging markets, October 2021

The 'E' in ESG: 4 charts on water stress and deforestation, October 2021

Biden's Climate Summit: The US-China cold war and the ESG context, April 2021

International Energy Agency calls time on Oil, May 2021

Indonesia signals development over deforestation curbs, November 2021


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Scandal at the World Bank and IMF is not good for emerging markets, September 2021

FATF updates its Grey List, merely one piece of the ESG puzzle, October 2021

Pandora Papers: A reminder of ESG corruption risk in EM and DM, October 2021

Corruption: The latest Transparency International scores in Emerging Markets, January 2021

Corruption: FinCEN Files a reminder of challenges for EM and ESG investors, September 2020

Corruption: The ugly truth for EM and ESG investors, July 2020

The changing art and risk of war in emerging markets, March 2020


The Tellimer Emerging Markets Investability Matrix, available to subscribers, contains over 160 market, economic, ESG, political metrics across over 50 countries – this includes almost 20 metrics each on governance and political risk.