Emerging Markets Rank Highly in ESG Ratings

The Netherlands and Colombia top the leader board for ESG values, the Morningstar Sustainability Atlas shows

Dan Lefkovitz 18 April, 2018 | 10:12AM

Morningstar Country ESG Scores

The Netherlands is the world's leading market for sustainability, but the high ranking of countries like Colombia, Taiwan, Hungary, and Turkey suggest that emerging markets can be leaders in sustainability too. The countries have been graded by the Morningstar Sustainability Atlas which looks at the environmental, social and governance (ESG) credentials of companies in 46 country indices.

European markets continue to occupy most of the top two quintiles in terms of overall sustainability, according to ESG researcher Sustainalytics. The Netherlands Index takes over the top spot thanks to such high-scoring companies as ASML (ASML), ING (INGA), Philips (PHIA), and Ahold Delhaize (AD). Nordic and many eurozone markets are not far behind.

Colombia lands in the top 20% and is the highest-scoring non-European market, thanks to Bancolombia (BCOLOMBIA), Ecopetrol (ECOPETROL), and Grupo Sura. Other emerging markets that score well include Hungary, Taiwan, and Turkey.

On the flipside, emerging markets such as China, Russia, Malaysia, and Indonesia, occupy the globe's bottom 20%. Australia boasts a strong sustainability profile, while the United States scores poorly, ranking below Japan, Brazil, and India. Korea continues to land in the globe's bottom 20% thanks largely to controversy. 

Switzerland and UK Most Exposed to Controversy

Sustainalytics defines a controversy as any incident that has an impact on the environment or society and poses a risk to the company involved. Companies with current involvement in ESG-related incidents are penalised in Morningstar’s methodology. Switzerland and the UK are the world's most controversy-plagued markets.

Swiss market controversies include Novartis (NOVN) and UBS (UBSG). Korea continues to be affected by controversies related to Samsung Electronics (005930), among others. Key UK constituents facing "High" or "Severe" controversies include HSBC (HSBA), Royal Dutch Shell (RDSB), and GlaxoSmithKline (GSK).

Portugal, Denmark and Netherlands Score Highly

European markets are the clear global leaders in the first pillar of ESG, the Environment. Portugal comes out on top, thanks to top holding Galp Energia (GALP), which is considered to be an industry leader among global energy players. Colombia is the greenest non-European market, while Taiwan, Korea, and Thailand are green leaders within Asia.

The Social Score, the second pillar of ESG, encompasses product safety, labour standards, and supply chain management. The globe's entire top quintile comprises European markets. The Morningstar Denmark Index scores well thanks to top holding Novo Nordisk (NOVO B). Colombia and Taiwan are leaders among emerging markets.

The Governance Score considers corruption, board independence, and business ethics. The Netherlands continues to serve as the world's leading market from a governance perspective. Australia and Colombia are the non-European markets in the globe's top tier. Australian banks Commonwealth Bank of Australia (CBA), Westpac (WPC), ANZ (ANZ), and National Australia Bank (NAB) are all considered standard bearers within their global peer group. Canada looks strong on the governance pillar. More surprising standouts include Brazil and South Africa.

The US looks weak on governance criteria, ranking below India and Turkey and in the same range as the Philippines, Indonesia, and Peru. China scores near the bottom of the globe. Korea and Japan are especially weak on governance as well.  

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
ASML Holding NV142.94 EUR1.64
Australia and New Zealand Banking Group Ltd24.77 AUD0.53
BanColombia SA32,380.00 COP0.87-
Commonwealth Bank of Australia68.43 AUD0.23
Ecopetrol SA3,020.00 COP-2.58-
GlaxoSmithKline PLC1,480.00 GBX0.71
HSBC Holdings PLC644.30 GBX0.89
ING Groep NV9.90 EUR0.74
Koninklijke Ahold Delhaize NV22.29 EUR1.32
National Australia Bank Ltd23.49 AUD0.43
Novartis AG86.92 CHF2.36
Novo Nordisk A/S B300.20 DKK0.12
Royal Dutch Shell PLC B2,350.00 GBX0.99
Royal Philips NV32.00 EUR0.44
Samsung Electronics Co Ltd40,250.00 KRW0.00
UBS Group AG12.38 CHF1.77
Westpac Banking Corp25.06 AUD0.80

About Author

Dan Lefkovitz

Dan Lefkovitz  is content strategist for Morningstar’s Indexes group