Last week, sitting comfortably on my sofa, I turned on the TV and stumbled upon the testimony of the Iranian actress Golshifteh Farahani. I felt quite helpless in front of so much suffering and injustice.
The Islamic Republic of Iran is an authoritarian and theocratic regime that has been in place for nearly 43 years. With a population of 86 million and a median age of 32, Iran is a large and youthful country with historically strong education and infrastructure systems. Sadly, those past strengths are being eroded, along with the rights and freedoms of the Iranian people.
According to Candriam’s Sovereign Sustainability Model – which assesses a country’s suitability for investment, ranking performance across the four core pillars of sustainable capital: natural, human, economic and social – Iran ranks 118 out of 123 countries globally. This is an appalling score and points to severe failures across virtually every metric we apply.
Human rights and freedoms are regularly violated by the forces of the state. Governance is catastrophic and corruption systemic. Poverty, inequality, and repression is widespread. Government has debt soared in the last few years from an average of 11.8% of nominal GDP or $45 billion during 2000-2018, to 41.5% of nominal GDP or $591 billion in 2021[i]. And environmental challenges are in the multiples, including extreme air pollution, desertification, widespread drought, and biodiversity loss. And despite being a major fossil fuel producing nation, Iran shows scant interest in innovation and renewable energy.
These factors alone would make the country uninvestable from our point of view, regardless of the fact Iran’s oppressive regime has been widely sanctioned by global organisations.
Of course, in the face of death, rape, and torture, which much of the Iranian population is confronted with all too often, a faraway investor’s decision not to invest and support this regime is not much solace. But it is an important decision. Being a responsible investor may not mean bringing an end to an oppressive regime or government, but it does mean making a modest contribution to not financing and supporting authoritarian and liberticidal regimes.
There is room for optimism though. After a period of populist governments making progress and an intense scrutiny of liberal democratic values, last year seems to have marked a turning point. According to the Tony Blair Institute[ii], the number of populists in power has reached its lowest point in 20 years, thanks, in particular, to South America, where many centre-left leaders have now taken power.
In the United States, the results of the mid-term elections in November 2022 have also shown that some independent candidates have begun to turn their backs on Donald Trump while supporting the Republican camp.
So, should we believe these developments suggest a structural change is underway? Are people starting to believe once again in the benefits of liberal democracy? Three big, globally relevant issues could support such a movement.
First, the war in Ukraine. As we approach the conflict’s first anniversary, Putin’s crimes demonstrate the deadly consequences of authoritarian rule. Yet prior to the war, there were many that judged Russia as a good investment given the country’s strong macroeconomic fundamentals.
The red flags and governance challenges that many investors ignored, have proven correct. Not being invested in Russia was the right decision to make, given the sanctions the country now faces. This is evidence enough that pure financial analysis that excludes ESG factors fails to adequately assess risk. All investors should now be learning the lessons of Ukraine. If they don’t, they risk being branded the Neville Chamberlain of financial markets.
Second, is the Covid crisis. After an initial period of uncertainty and confusion everywhere, the pandemic illustrated the virtues of good governance, collaboration, and transparency. The zero Covid management and subsequent U-turn of the Chinese Communist Party have, despite perhaps its best intentions, only served to illustrate its poor respect of human rights and civil liberties – with the tragic consequence of millions of deaths.
The democracies that coordinated to vaccinate their population, while trying to remain transparent about deaths and alert to the hazards of long periods of restrictions on civil liberties, have won the debate on the right approach. No system was without its flaws and mistakes during covid, but liberal democracies today have emerged stronger in the face of populist and more authoritarian regimes. People are rewarding the liberal democratic approach.
Third, is global warming and the increasing number of extreme climate events. Contested by some governments not so long ago, nature is now getting the better of the demagogues. In Europe, the last seven years were the hottest years ever recorded[iii]. According to a federal report[iv], major weather disasters in the United States caused $165 billion in damage in 2022 – the highest annual figure on record. All governments will be confronted with climate challenges, with colossal consequences for the sustainability of the debt of certain countries. Those who ignore the climate will simply become uninvestable.
For a long time, a discourse challenging the existence of universal values has been the bedrock of authoritarian regimes, claiming economic efficiency in contrast to sluggish and arrogant democracies. These values, often criticised as a particular expression of the Western will to dominate the world, remain under attack today. But they must continue to be defended. Not only because this is an altruistic fight but because as an investor it is also a bet for the future.
Will a government that wages war, threatens the physical and mental integrity of its citizens, and doesn’t care about global warming really be credible to repay its debt? All the signs and recent evidence suggest they won’t be. Perhaps if all investors started to think that way, liberal democracies underpinned by universal values might finally win.
Nicolas Forest
Global Head of Fixed Income
[i] https://www.imf.org/-/media/Files/Publications/REO/MCD-CCA/2022/April/English/statisticalappendix.ashx
[ii] https://institute.global/policy/repel-and-rebuild-expanding-playbook-against-populism
[iii] Source: Copernicus Climate Change Service
[iv] https://www.nbcnews.com/science/environment/extreme-weather-caused-165-billion-damages-last-year-noaa-says-rcna64290
