Morningstar, which recently launched its own range of ESG-filtered equity indices, assigned an ESG-score to each constituent of 35 country indices. The country scores are an asset-weighted combination of these individual company scores. The scores are a reflection of relative sustainability within a sector, meaning a country with a relatively high exposure to ‘unsustainable’ sectors such as commodities is not at a disadvantage.
Morningstar’s ranking clearly reveals the Eurozone as a mecca for ESG investors: the 12 countries with the highest ESG scores are all listed in the common currency area. Portugal (with a score of 67.5 on a 100-point scale), the Netherlands and the Nordic countries received the highest scores. They score especially high on Governance, which is thought to be the most reliable indicator of outperformance among the three letters that constitute the ESG acronym.
Emerging markets score a whole lot worse than the Eurozone countries on all three ESG metrics, with China and Russia standing out. Many of the companies listed in the two countries are government-controlled, and the governments of the two countries are notorious for their lack of transparency and accountability, whilst often prioritising economic development over environmental and social consciousness.
The only EM country coming close to rivalling Europe is South Africa, which actually received a higher overall ESG-score than the United States and Japan on all three ESG-criteria. US and Japanese companies indeed hardly do better than those listed in emerging markets.
“The highest-scoring non-European country is Australia, whose Morningstar Index ranks 14th out of the 35 equity benchmarks. The United States ranks in the second-lowest quintile,” notes Francesco Paganelli, research analyst at Morningstar.