Press freedom a black ESG mark for China and Vietnam

  • Latest Press Freedom Index released this week: a potential governance measure in a top-down ESG country screen
  • Largest weights in MSCI equity indices for EM (China, 38%) and FM (Vietnam, 31%) remain among the least free
  • EM and FM portfolios generally side-step these inconvenient ESG country "truths" and focus on company metrics
Press freedom a black ESG mark for China and Vietnam

ESG criteria are now touted by almost every equity fund. ESG metrics are, particularly in emerging and frontier markets, at a fairly nascent stage. But most portfolio managers tend to concentrate on company-specific metrics (eg on carbon footprint, ethical products, or board composition) and ignore the larger issue of governance at the country level.

This is perhaps explained by the fact that the two largest countries in the MSCI EM and FM indices, China with a 38% weight (excluding Hong Kong) and Vietnam with a 31% weight, respectively, have generally poor scores in third party indices of governance and freedom. The latest example, the Reporters Sans Frontieres Press Freedom Index for 2021, released this week, is perhaps the most glaring one: out of 180 countries globally, China ranks 177th and Vietnam 175th (and Vietnam's absolute index score has deteriorated by 5% compared to last year). Below, we chart the results of this year's index across EM and FM countries.

A separate and broader debate is whether governance and freedom, as measured by the likes of the EIU ("Democracy"), Heritage or Fraser ("Economic Freedom"), TRI ("Corruption"), or, in this case, RSF ("Press Freedom") have much to do with country-level growth and stability, and investment returns on the time frame that most institutional portfolios are judged? Whichever side of this debate EM and FM portfolio managers sit, they may have to increasingly incorporate top-down (country-level) metrics as well as bottom-up (company-level) ones to faithfully deliver on the ESG promise of their marketing material.

Press Freedom: Largest countries in the Emerging (China) and Frontier (Vietnam) equity indices score very poorly

Related reading

Human rights presents a dilemma for ESG investors and US foreign policy, February 2021

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

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