Advisors with clients who invest internationally may be interested in Morningstar’s latest sustainability atlas, which rates 46 global equity indexes based on their ESG and ESG-related controversy scores. The 46 Indexes represent 97% of global market capitalization.
The ratings can be useful for clients who are interested in socially responsible investments — investments that exclude certain types of companies, such as cigarette producers, or include companies that rate high on environmental, social and governance metrics or are actively engaged in addressing E, S or G issues.
In general, European stock indexes merit higher sustainability ratings than U.S. indexes — which usually score below the median, in large part due to ESG-related controversies. U.S.-based companies like Facebook, Alphabet (Google’s parent company), Amazon and Wells Fargo, for example, score low due to governance controversies.
The Netherlands merits the top sustainability rating because ESG-friendly companies like ASML, a leader within the global semiconductor industry, and ING Group, a banking giant, are included in the country’s stock indexes. Finland, home to Nokia, a leader within the global technology hardware industry and Kone, a machinery outperformer, is a close second.
On the flip side are the low scorers for sustainability and ESG: emerging markets including Russia, China, Qatar, the United Arab Emirates, Egypt, Poland and the Czech Republic and the developed markets of Israel and Singapore.
Asian countries are mixed, with Japan, Taiwan, India and Thailand tending toward middling scores and besting the U.S. for sustainability while Korea, Singapore and the Philippines score below the U.S.
In addition to its overall sustainability and ESG scores, the Morningstar atlas rates global indexes based on the individual metrics that comprise the ESG ratings — environmental, social and governance. For the first time, the atlas also includes ratings on the carbon metrics of country stock indexes: their carbon intensity, or total greenhouse gas emissions per millions of dollars of revenue, and carbon risk, the risk related to a global move away from fossil fuels.
Scandinavian countries plus Finland, the Netherlands and France not surprisingly score high on individual environmental, social and governance ratings, but so do Portugal and Spain.
Portugal scores the highest for environmental metrics due to the companies Galp Energia, considered a leader among global oil and gas producers, and EDP, which has embraced environmental best practices more than other global utility companies.
Denmark is the leader on the social side, due to high ratings for companies like Novo Nordisk, a pharmaceutical manufacturer, and Coloplast, a medical device company.
The Netherlands, home to ING Group and health technology company Royal Philips, scores highest on governance.
Many of the same countries that have high sustainability and ESG scores, such as Denmark and Sweden, have low scores for carbon risk and carbon intensity. The opposite is true for countries with low sustainability and ESG scores. Countries like the Czech Republic, Poland and Russia are among those countries whose stock indexes have high exposures to both carbon metrics.
Although the U.S. is a heavy emitter of greenhouse gases, its carbon metrics scores are relatively low because energy stocks represent just 6% of the country’s market capitalization compared to 60% for Russia. Health care and technology companies together account for more than one-third of market capitalization in the U.S.
— Related on ThinkAdvisor:
- How Fund Investors Use Sustainability Ratings
- How to Take a Passive Approach to Sustainable Investing
- How to Understand ESG Ratings
- Another Way ESG Investing Can Boost Portfolios