Which Countries Lead the Way in Sustainability?

Morningstar Sustainbility Scores show how carbon and controversies can affect a country's investment credentials

Valerio Baselli 30 January, 2020 | 2:40PM
Facebook Twitter LinkedIn


While much of the world has made substantial improvements in terms of environmental, social, and governance criteria, it’s European countries - and particularly the Northern ones -who hold the title of most virtuous global sustainability leaders. This is somewhat expected, since these 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 indices 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.

Finland Leads the Pack, While China Lags 

The map below shows that 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 constituents such as 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, 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.


How Controversies Affect Sustainability Scores

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 S.A. and Petróleo Brasileiro.

The US 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.

Sustainability Drives Returns

Even now, 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.

Download the "Morningstar Sustainability Atlas" for more insights on country-specific sustainability profiles

Get My Copy

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.

Facebook Twitter LinkedIn

About Author

Valerio Baselli

Valerio Baselli  is Senior International Editor at Morningstar.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures