HSBC Holds Back UK in ESG Ranking

Global ESG rankings reveal China and Russia to be laggards, while the UK and Switzerland score highly. Facebook and Google drag down the US to middle of the table

Dan Lefkovitz 3 October, 2018 | 7:21AM

The Morningstar Sustainability Atlas has revealed European markets set the global standard when it comes to corporate-level sustainability. Portugal scores highest on environmental criteria, Denmark on social, and the Netherlands on governance.

Elsewhere in the world, Colombia is the world's highest scoring non-European market for sustainability, led by companies like Bancolombia and Grupo Sura. Taiwan is the top Asian market for sustainability thanks to Taiwan Semiconductor, a global ESG leader.

Switzerland and the United Kingdom score well on ESG criteria, but controversies involving key index constituents like UBS and HSBC (HSBA) lower their overall sustainability scores. The United States is a middling performer on sustainability. Controversy is one factor; another is poor Governance Scores for companies like Facebook (FB), Alphabet (GOOGL), and Amazon (AMZN).

Japan and Korean equities score poorly on corporate governance criteria. China lands in the globe's bottom tier across all three ESG criteria. Companies like Cosco Shipping, China Resources Gas, and PetroChina are ESG laggards.

Morningstar analysts examined the sustainability profiles of Morningstar’s 46 country-specific equity indexes using company-level Environmental, Social, and Governance Scores. The country indexes, which span developed and emerging markets and represent 97% of global market capitalisation, vary significantly across ESG criteria.

How is it Calculated?

The Morningstar Sustainability Atlas takes a bottom-up approach. National equity markets are scored on the basis of the companies constituting their equity market indexes. The same methodology that powers the Morningstar Sustainability Rating for funds is applied to assess the sustainability profile of indexes.

Sustainability assessments are provided to Morningstar by ESG researcher Sustainalytics, which assigns ESG Scores to more than 10,000 companies across the globe. Sustainalytics compares companies' ESG profiles with their global industry peers, based on industry-relevant indicators. Research is conducted across dimensions of preparedness, disclosure, quantitative performance, and qualitative performance. Thus, scoring is based on both words and deeds.

The Sustainability Atlas may be used to identify which geographic areas present the best ESG-related opportunities and which might be avoided by sustainability-minded investors.

Map of Sustainability Scores

Sustainability Scores consider both ESG and Controversy. European countries lead the world when it comes to the sustainability profiles of their equity market constituents. The Netherlands scores highest thanks to holdings like ASML, considered a leader within the global semiconductor industry, and ING Groep, a banking leader.

Map of Morningstar Country Indexes' Sustainability Scores

Finland's high score owes to Nokia, a leader within the global technology hardware industry; Kone, a machinery outperformer; and UPM-Kymmene, considered by Sustainalytics to be a superior paper and forestry company.

Colombia continues to stand out as the only non-European market within the world's top tier. Bancolombia is considered a leader among global banks, and Grupo Sura an outperformer among diversified financials companies. That Colombia is an emerging market is even more impressive. Hungary is another top-performing emerging market thanks to MOL, considered by Sustainalytics to be a leader among global oil and gas production companies.

Australia scores well thanks partly to its big banks. A group of emerging markets, including Russia and those in the Middle East, occupy the globe's bottom quintile. Israel and Singapore stand out as developed markets among this group of laggards. The U.S. scores below the global midpoint, dragged down by ESG-related controversies.

Map of ESG Scores

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.

Map of Morningstar Country Indexes' ESG Scores

The Morningstar Denmark Index's high scores are driven in large part by top holding Novo Nordisk, which is considered a leader within the global pharmaceuticals industry. Switzerland's high score owes in large part to Nestle, Sweden's to Nordea, Portugal's to utility EDP, and France's to Total, Sanofi, and BNP Paribas, among others. Brazil scores well on ESG criteria; Itau Unibanco, a large constituent, is considered an outperformer among global banks.

The U.S. posts a middling ESG Score, with Cisco, Hewlett Packard, and State Street considered to be leaders, while Netflix, Starwood Property Trust, and the Liberty companies are viewed by Sustainalytics as laggards.

India presents a similarly mixed picture: technology companies Infosys, Wipro, and Tata Consultancy Services are considered global leaders, while several big banks, including Bank of India, ICICI, and Punjab National Bank, are laggards.

China lands 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. Cosco Shipping, China Resources Gas, and PetroChina are all viewed as laggards.

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
Alphabet Inc A1,450.50 USD1.31
Amazon.com Inc1,853.25 USD1.36
Facebook Inc A217.79 USD1.36
HSBC Holdings PLC567.70 GBX1.54

About Author

Dan Lefkovitz

Dan Lefkovitz  is content strategist for Morningstar’s Indexes group

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