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GRAPH OF THE MONTH
Democracy as a starting point of DPAM’s model
Emerging economies are generally considered to have high potential, notably due to their young and growing population. Although most are not always seen as having sustainability or recognised democratic processes, integrating sustainability criteria into the management of a portfolio investing in these countries can be of real added value.
Source: DPAM, October 2018
* independent territories (no countries and therefore not part of the ranking)
The core of the model is the democratic values. Upholding these is a moral obligation to DPAM, which is intrinsically linked to the stance of a sustainable investor. Indeed, academic research has demonstrated that there is a clear correlation between the quality of the institutional framework of a country and its default risk.
DPAM uses the research of the international NGO Freedom House to assess the democratic development of a country. Based on an annual survey containing 25 questions on political rights and civil liberties, a country is attributed the status of ‘free’, ‘partially free’ or ‘not free’. This information is complemented by the Democracy Index published by The Economist Intelligence Unit, which is also based on approximately twenty questions to assess the democratic level of a country. This latte is attributed the status of “democracy”, “flawed democracy”, “hybrid regime” or “authoritarian regime”.
Several countries within the emerging universe do not fulfil the minimum requirements in terms of democracy and investment leeway. In total, the investment strategy linked to this sustainability ranking refrains from investing in countries which have been categorised by reputable international sources as‘not free’ and confirmed as “authoritarian regimes”. These include Gabon, Qatar, Belarus, Bahrein, Azerbaijan, Russia, Kazakhstan, Rwanda, the United Arab Emirates, Vietnam, Saudi Arabia, China, Angola, Ethiopia, Congo, Oman, Cameroon, Venezuela and Egypt.
Studies indicate there is a clear link between the democratic level of a country and its sustainability. It should therefore not come as a surprise that the majority of those countries deemed ‘not free’ are at the bottom of the sustainability ranking.