China’s listed firms make it the global laggard on environmental, social and governance factors while Big Tech is dragging on the US score.
Global ratings firm Morningstar has just published a Sustainability Atlas examining and rating 46 country equity indices on ESG criteria.
Morningstar researchers analysed the firm’s entire suite of global equity indexes, representing 97 percent of global market capitalisation for the first time incorporating the firm’s Carbon Metrics to assess companies’ vulnerability to the transition from fossil fuels.
The Atlas reveals some striking differences between the world’s indices with some surprising winners and losers.
Northern Europe leads the way when it comes to corporate-level sustainability, with Denmark scoring highest on social criteria, the Netherlands on governance criteria, and Portugal on environmental criteria.
Finland is the world’s most sustainable stock market, thanks to holdings like Nokia, an ESG leader within the global technology hardware industry, Kone, another ESG leader in the machinery sector and Neste Corp, a downstream oil and gas company.
The Netherlands’ owes its high score to index constituents like ASML, a leader within the global semiconductor industry with no evidence of controversies, and ING Groep, a banking leader.
Colombia is the world’s highest-scoring non-European market for sustainability, despite the Atlas showing a high transition risk.
China is last in global ESG rankings, primarily due to poor corporate governance among companies like Alibaba and Tencent relative to their global peers. Other Asian markets like Japan and Korea score poorly on corporate governance, due to underperformance from companies such as SoftBank and Toyota in Japan and Samsung in Korea.
The United States ranks in the fourth quintile of global sustainability leaders because of a significant level of controversy from Amazon, Apple, and Microsoft, and poor governance scores from Facebook and Alphabet. On the other hand, the U.S. is the only non-European country to rank in the best quintile for carbon risk.
Hungary, ranking 13th out of 46, is another top-performing emerging market thanks to MOL, considered by Sustainalytics to be a leader among global oil and gas production companies. Taiwan is the top Asian market in terms of sustainability, thanks to the big role played by Taiwan Semiconductor Manufacturing, a global ESG leader.
ESG in the round
ESG Scores aggregate the Environmental, Social, and Governance pillar scores and ignore deductions made for controversial incidents. The top quintile is populated entirely of developed European markets, with the Netherlands in the top position, while emerging markets from Asia, the Middle East, and Europe occupy the bottom quintile.
The Morningstar Denmark Index’s high score is driven by top holding Novo Nordisk, which is a leader within the global pharmaceuticals industry. Switzerland’s high score owes in large part to Nestle, an ESG leader among packaged food producers, and Novartis, an outperformer among pharmaceuticals. France’s good score is linked to global ESG leaders Total, Sanofi and BNP Paribas.
Germany also scores well on ESG criteria, with several index constituents, including SAP, Allianz, and Siemens, considered to be global ESG leaders in their respective industries. The UK lands in the second quintile, with companies like Royal Dutch Shell and GlaxoSmithKline classified as outperformers.
The U.S. posts a middling ESG Score, with Cisco, Hewlett Packard, and Johnson & Johnson considered to be leaders by Sustainalytics, while Netflix, Starwood Property Trust, and Liberty are viewed as laggards. As per the Morningstar Russia Index, the heaviest components (Sberbank, Lukoil, Gazprom, Tatneft, and so on) are all average performers.
China is in the globe’s bottom tier across ESG criteria. Technology player Lenovo is the only company in the Morningstar China Index considered to be a leader on ESG. China Resources Gas, JD.com, and PetroChina are all viewed as laggards.
Controversies drag on Brazil and Switzerland
Sustainalytics defines a controversy as any incident that has an impact on the environment or society and poses a risk to the company involved.
Switzerland scores well on global ESG criteria (ranking third out of 46), but the number of controversies involving key companies such as Novartis and Nestlé lower its overall Sustainability Score, so that it comes in much lower—at 12th—on that scale. The same is true for Brazil, which is in the upper middle quintile on ESG criteria but ultimately placed in the bottom half for overall Sustainability Score, owing to controversies from some of the country’s largest companies, like Vale S.A. and Petróleo Brasileiro.
In the U.K., HSBC, Shell, and GlaxoSmithKline are all facing high levels of controversy, while Russia is dragged down by Gazprom and Norilsk Nickel, among others. Samsung weighs on Korea’s score, and Volkswagen and Deutsche Bank on Germany’s.
Environmental factors alone
The Environmental Score, the first pillar of ESG, incorporates issues such as assessments of carbon emissions, waste management and energy usage, among other criteria.
European markets continue to set the global standard. Portugal scores highest thanks to oil and gas producer Galp Energia viewed as having strong management of emissions, effluents, and waste, and EDP, which has embraced environmental best practices compared with other utilities around the world.
Hungary is the top-scoring emerging market, largely thanks to MOL, which takes a leading position on environmental issues. Korea is the top-scoring non-European country, with its largest index constituent, Samsung Electronics at least scoring well on environmental criteria. Taiwan is another strong environmental performer, driven by top holding Taiwan Semiconductor. The U.S. market is a middling performer from a general environmental perspective, in the same range as Australia, India, Japan, and Brazil.
The Social Score, the second pillar of ESG, encompasses product safety, labour standards—defined as freedom of association, working conditions, discrimination, and diversity—and supply chain management. European markets, once again, lead the pack. Denmark tops the world on the social side, thanks to the largest company in the market, Novo Nordisk, as well as Danske Bank and Vestas Wind Systems – the latter, for example, implemented a variety of initiatives for human capital development, such as training and leadership programs, international mobility, bonus schemes, flexible working conditions, and employee satisfaction surveys.
Italy stands out for its performance across social criteria, driven in large part by large index constituents Enel and Intesa Sanpaolo. For Germany, Siemens and SAP drive a top score.
The U.S. is a middling performer on social criteria, along with Brazil and India. Within the U.S. market, Symantec, IBM, Dell, and Intel score well, while Herbalife, Wells Fargo, Walmart, and Netflix are notable underperformers.
The Governance Score considers corruption, board independence, and business ethics. The Netherlands tops the globe on governance.
Dutch companies with outstanding Governance Scores include Unilever, ASML, and Royal Philips. Colombia is in second place. Bancolombia, the largest constituent of the Columbian index, is considered by Sustainalytics to be a global leader among financial institutions, thanks to its strong policy on money laundering. Australia also joins the usual European markets in the globe’s top tier.
Governance is the weakest of the three ESG pillars for the U.S. market; large index components Amazon and Facebook are judged as laggards. While the former has faced pressure over the past few years in multiple jurisdictions over alleged tax avoidance strategies, the latter has been facing concerns across multiple fronts, such as privacy management and content governance.
Carbon Intensity measures a portfolio’s carbon footprint by aggregating the Carbon Intensity Scores of each holding on a weighted basis.
Sustainalytics looks at companies’ total greenhouse gas emissions per millions of dollars of revenue. The world’s least-carbon-intensive equity markets include Peru and Egypt, owing to the small carbon footprints of the banks, telecoms, and property companies that dominate those indexes. Most Western European markets have low carbon footprints relative to the sizes of their businesses, with Sweden scoring the best, followed by Belgium. Developed Asian markets Singapore and Japan also score well.
Russia’s fossil-fuel-heavy economy also looks carbon intensive at the corporate level. The U.S. and the U.K. do not have especially large carbon footprints given the size of their companies. Indian and Colombian companies look quite carbon intensive.
The most-carbon-intensive country is the Czech Republic, given that utilities company CEZ accounts for 42% of its index.
Carbon Risk assesses the degree to which corporate value is at risk from the transition to a low-carbon economy. Companies with low levels of Carbon Risk are best poised to survive and thrive as the world moves away from fossil fuels.
Western European markets like Switzerland, the Netherlands, Denmark, Spain, and France are deemed to carry low levels of Carbon Risk, as do South Africa, Japan, and Korea.
Surprisingly, despite being the world’s second-largest carbon emitter, a low level of U.S. stock market value is at risk from the transition to a low-carbon economy. The U.S. is the only non-European country to rank in the best quintile for this score owing to the fact that healthcare and technology companies represent more than 36% of U.S. equity market cap; energy is around 5%.
On the flip side is Russia, with nearly 60% of its market cap in energy stocks and consequently the world’s highest level of Carbon Risk.
- This article first appeared on ESG Clarity‘s sister site, Global Investment Megatrends.