While much of the world has made substantial improvements in terms of environmental, social, and governance criteria, it’s European countries—particularly those in the North — that hold the title of most virtuous global sustainability leaders. This is somewhat expected, since those nations have always been ahead of the curve on this front, but a few other countries also feature exceptionally strong sustainability profiles.
In the latest edition of the “Morningstar Sustainability Atlas” we use the constituents of Morningstar country indexes to examine the sustainability profiles of 46 global equity markets. The company-level scores are sourced from Sustainalytics, which also powers the Morningstar Sustainability Rating for funds. Investors can use this data to identify countries with the greatest ESG investment opportunities and most significant risks. They can also track their ESG-related Portfolio Controversy Scores with this data.
The Nordics and Eurozone came out on top of sustainability rankings: Denmark scored highest on social criteria, the Netherlands on governance, and Portugal on environmental criteria.
Finland takes the title of the world’s most sustainable stock market, thanks to holdings like Nokia, an ESG leader within the global technology hardware industry, and KONE, an ESG leader in the machinery sector.
Colombia, meanwhile, solidifies itself as the world’s highest-scoring non-European market, due to companies like Bancolombia, Ecopetrol, and Cementos Argos, which is a global ESG leader in its industry. However, the Colombian market also shows great carbon risk, or a high degree of risk to corporate value as a result of the transition to a low-carbon economy.
On the other hand, China, Russia, and Middle Eastern countries assume the lowest sustainability ratings. China, in particular, falls in the bottom quintile for rankings of all three global ESG criteria, mainly due to poor corporate governance from companies like Alibaba and Tencent.
Controversies Dent Performance
Sustainalytics defines a controversy as any incident that has an impact on the environment or society, and therefore poses a risk to the responsible company and its overall sustainability performance.
The “Morningstar Sustainability Atlas” shows the level of impact of these events. For example, Switzerland scores very well on global ESG criteria (ranking third out of 46), but the number of controversies involving key companies such as Novartis and Nestlé ostensibly lower its overall sustainability score, so that it comes in much lower—at 12th—on that rating scale. The same is true for Brazil, an upper-middle performer on ESG criteria that ultimately placed in the bottom half for overall sustainability score, due to controversies from some of the country’s largest companies, like Vale and Petróleo Brasileiro.
The United States, for its part, ranks in the fourth quintile of global sustainability leaders due to a significant level of controversy from big index constituents like Amazon, Apple, or Microsoft, and poor governance scores from companies like Facebook and Alphabet.
Then again, despite being the world’s second-largest carbon emitter, the US boasts a low level of carbon risk due to heavy healthcare and technology weights. The US is the only non-European country to rank in the best quintile for this score.
Even in 2019, many investors fear a negative impact on returns if they invest sustainably. Yet, the empirical evidence tells us quite a different story.
A review of the Morningstar Sustainability Index family’s performance demonstrated that while sustainability screens add value during some periods and subtract in others, in the long term they can propel returns and privilege less volatile, competitively advantaged and financially healthy companies. Hence, claims that investors need to surrender returns to engage in sustainability are flawed. Sustainable investing serves as a positive force to drive returns and is not a fundamental drag on performance at the market level.
