Emerging Market Companies Outperform US Companies on ESG

A new sustainability report by Morningstar reacheda surprising conclusion: ESG practices in some emerging markets are superior to those of the US.

Companies in emerging markets such as Colombia, Hungary, Taiwan, and South Africa outscore major developed market players such as the US in implementing environmental, social and governance (ESG) policies, according to a new report by investment research andmanagement firm Morningstar, Inc.

Morningstar’s Sustainability Atlas shows that companies in emerging markets are responding to rising global demand from investors and consumers for corporate practices respectful of the environment, gender equality and for transparent supply chains, while their counterparts in developed markets are often entangled in ESG-related controversies that hurt their scores.

“Investors have significant influence over the entities in which they invest, and they are now asking corporates to embed ESG awareness and activity into the day-to-day business,” Olwyn Alexander, Global Asset and Wealth Management Leader at Pricewaterhouse Coopers (PwC), tells Global Finance.

Morningstar’s report ranking the ESG profiles of 46 countries based on their companies ESG performanceadjusted for market weight confirms Europe’s leadership in sustainability scores. Companies such as ING Groep, ASML Holding, Philips, and Ahold Delhaize with high scores propelled the Netherlands to the top slot in the global ranking while Bancolombia, Ecopetrol, and Grupo Sura made Colombia the leader among emerging markets and the highest-scoring non-European market. While Colombia scores 57.6, the U.S. sits far behind at 45.2, one of the poorest developed market performers alongside Israel, Singapore, South Korea and New Zealand. Qatar, Russia, China, Egypt and UAE also score poorly among emerging markets because of their financial-services and telecom companies, Morningstar says.

The Morningstar report supports recent studies cited by PwCshowing that companies focusing on ESG issues most financially relevant to their industry tend to perform well.

“Consumers have plenty of choice, so if corporates do not respond they know they risk losing business to competitors, so there is a competitive element to having good ESG policies. As bad governance, social or environmental practices are exposed with greater transparency, the world of investors and consumers, as well as regulators, is responding,” says Alexander.“Climate change, for example, has become more evident to many in their day-to-day lives. Younger generations are acutely aware of the earth, the impact we have on the Earth, the importance of having a social purpose, of having good governance,” she says.

Qatar – 37.2 Israel – 39.9
Russia – 37.6 Singapore – 41.7
China – 39.2 S. Korea – 42.7
Egypt – 41.8 U.S. – 45.2
UAE – 40.6 New Zealand – 46.1

Source: Morningstar Inc., “Morningstar Sustainability Atlas” April 2018.