Raiffeisen ESG Sovereign Indicator

This poses several new questions as far as a sustainability assessment of countries is concerned, including:

• How can the issue of security architecture be integrated into a systematic sustainability assessment of countries?

• What do we understand by “militarisation”, and how is it measured?

• How can militarisation be assessed at country level?

We have attempted to find answers to the most pertinent questions relating to security architecture in a country context. With regard to the Raiffeisen ESG Sovereign Indicator, it became clear fairly quickly that some fine-tuning is needed in order to incorporate the various issues in a logical and conclusive way.

Integrating the issue of security architecture in a systematic way begins at the roots (what are relevant KPIs?), before asking what belongs with which core topics and with what weighting and then finishing with the question of what role a qualitative assessment of this issue should play.

The Raiffeisen ESG Sovereign Indicator is a rating tool designed to assess countries’ capacity for sustainability.

• Combined rating making use of in-house assessments and reputable external agencies

• Systematic evaluation on four levels

• Focus on quantitative assessment methods – currently more than 40 key performance indicators (KPIs) assigned to 12 core sustainability topics

• Within the sustainability rating, greater emphasis is placed on the E (environmental) element than on S (social) or G (governance)

• Annual rebalancing, ongoing monitoring

Key performance indicators

As a basic principle, we believe that highly militarised countries score worse on sustainability criteria than those with a low level of militarisation. This is mainly because financial or human resources used for military ends benefit the sustainability cause less than those provided for childcare, education, or health care, for example. One ratings model that takes this line of thought very much into account is the Global Militarisation Index (GMI), which has been calculated by the Bonn-based BICC* since 1990. This reflects the relative strength and importance of a country’s military apparatus in relation to society as a whole:

• Military spending in relation to gross domestic product (GDP) and public health care spending (as a percentage of GDP)

• Total number of (para-)military personnel and reservists in relation to doctor numbers and the total population

• Number of heavy weapons systems in relation to the total population

The GMI currently forms part of the governance element in the Raiffeisen ESG sovereign indicator.

Overview of the 2021 GMI rankings

What role does qualitative assessment play in this area?

Quantitative assessments ultimately require careful scrutiny, particularly when it comes to a country’s military security policy. Can one really blame countries like Israel, South Korea, or Ukraine for being in the world’s top 20 most highly militarised countries back in 2020? Hardly! Thus, the quantitative ratings provided by the GMI form the basis of the sustainability assessment. For instance, being highly militarised will push a country’s governance rating down as a basic principle, giving it a poorer sustainability rating overall. Nevertheless, the country’s quantitative assessment at the second level (E, S, G) can be overridden if there is sufficient justification, generally in the event of ESG controversies.

These are incidents or circumstances where countries exert a negative impact on sustainability issues through their own actions or a conscious acceptance of the situation. The scale of the qualitative reassessment depends on the severity of the incident and the quantitative scoreassigned to the country in question. Within Raiffeisen’s own rating system, the leeway for making qualitative adjustments to a score amounts to up to 50% of the points available for the quantitative rating, thus clearly emphasising the importance of careful scrutiny.

Further explanation

*Bonn International Center for Conflict Studies (BICC) GmbH is a limited-liability company under German law that is headquartered in Bonn. It is committed to promoting peace and development and is one of Germany’s five most important institutions for peace research alongside the Institut für Entwicklung und Frieden (Institute for Development and Peace), Forschungsstätte der Evangelischen Studiengemeinschaft e.V. (the Research Centre of the Protestant Student Community), the Institute for Peace Research and Security Policy at the University of Hamburg (IFSH) and the Peace Research Institute Frankfurt (HFSK).

**As a basic principle, a country with a high score in a particular area of sustainability will have more to lose than one that performs very poorly in that area.