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Europe, Emerging Markets Lead in Sustainability

Europe, Emerging Markets Lead in Sustainability

Editor's note: You can find our Sustainability Atlas here.

Karen Wallace: For Morningstar, I'm Karen Wallace. Sustainability is an area of increased interest for investors. Here to give a cross-country perspective on sustainability is Dan Lefkovitz. He is a strategist for Morningstar Indexes.

Dan, thank you so much for being here.

Dan Lefkovitz: Thanks for having me, Karen.

Wallace: In the lead up to Earth Day you released a new edition of the Sustainability Atlas. How does the Atlas work?

Lefkovitz: For those who are familiar with the Morningstar Sustainability Rating for funds, it's very much aligned. The globe rating looks at funds' sustainability profiles judged by the environmental, social, and governance practices of the companies and its portfolio. For the Atlas, we are looking at Morningstar's family of 46 country indexes, and we are looking at how the constituents of those indexes stack up on environmental, social, and governance factors.

Wallace: What were some of the big takeaways from this edition?

Lefkovitz: It wasn't surprising to see European countries in the lead. They are pioneers when it comes to sustainability practices, especially markets in the Nordics and the Eurozone. The Netherlands was the best scoring country in terms of sustainability in this edition.

What was more surprising was to see some emerging-markets companies score very, very well. Colombia actually scored in the top quintile of the world in terms of the environmental, social, and governance of its index constituents. Taiwan, Hungary, Turkey were also very high scorers. Now, certainly, there are some emerging markets--China and Russia, some Southeast Asian countries, the Middle Eastern markets--that scored poorly, but it was surprising to see select emerging markets score well.

Wallace: That is interesting. What are some of the drivers for that?

Lefkovitz: If you take the case of Colombia, several companies that are prominent in the Morningstar Colombia Index--Bancolombia, SURA Insurance--scored very well. In the case of Taiwan, it's a narrow market dominated by Taiwan Semiconductor. I think a lot of companies in emerging markets are discovering that environmental, social, and governance practices are often just good business practices. Energy efficiency, sure it's good for the earth but it's also about saving money. Treating your workforce well is good for society, but it's also a good way to attract and retain top-level talent. On the governance side, having an independent board of directors is a good check on corporate decision-making, often leads to better decisions. ESG is also a good risk control as well.

Wallace: Dan I know one question a lot viewers will have is how does the U.S. stack up in terms of the 46 countries that you studied.

Lefkovitz: The U.S. market scores middle of the road when it comes to environmental, social, and governance practices. The overall score of the U.S. market is brought down by controversy. A lot of prominent constituents of the U.S. market index are embroiled in ESG-related controversies. Wells Fargo springs to mind, Johnson & Johnson and Apple. U.K. and Switzerland are also markets where the controversy involving key index constituents is dragging down the overall score.

Wallace: Thank you so much for being here to discuss the sustainability atlas. We will put a link to it in the video player.

Thank you again, Dan.

Lefkovitz: Thanks, Karen.

Wallace: For Morningstar, I'm Karen Wallace. Thanks for watching.

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About the Authors

Dan Lefkovitz

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Dan Lefkovitz is strategist for Morningstar Indexes, responsible for producing research supporting Morningstar’s index capabilities across a range of asset classes. He contributes to the Morningstar Direct℠ Research Portal, authors white papers, and frequently hosts webinars on index-related topics.

Before assuming his current role in 2015, he spent 11 years on Morningstar’s manager research team. He held several different roles, including analyst and director of the company’s institutional research service. From 2008 to 2012, he was based in London, helping to build Morningstar’s fund research capability across Europe and Asia. Lefkovitz also participated in the development of the Morningstar Analyst Rating™, the Global Fund Report, and edited the Fidelity Fund Family report from 2006 to 2008.

Before joining Morningstar in 2004, Lefkovitz served as director of risk analysis for Marvin Zonis + Associates, a Chicago-based consultancy. During this time, he coauthored The Kimchi Matters: Global Business and Local Politics in a Crisis-Driven World (Agate, 2003).

Lefkovitz holds a bachelor's degree from the University of Michigan and a master's degree from the University of Chicago.

Karen Wallace

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