Bank exposure leads to higher ESG score

There is a correlation between large-cap Australian equity funds holding high exposure to the financial sector and a higher sustainability score, according to Morningstar.

Morningstar has released the environment, social, and governance (ESG) scores for global managed funds and exchange traded funds, based on ESG company ratings supplied by Amsterdam-based firm, Sustainalytics. The initiative was launched in August 2015.

Morningstar was currently releasing sustainability ratings across equity categories. In Australia it had assigned ratings to around 2,645 vehicles across superannuation funds, allocated and pension funds, unlisted trusts (or open-end funds), ETFs, and listed investment companies.

It also gives a controversy score, which identifies and quantifies the scale of negative incidents occurring in a company. But this is not relative to the industry, and a higher controversy score would result in lower ESG scores for the company.

VIEW ALL

View all

The research said that while the correlation between higher exposure to financials and a higher ESG score may seem contradictory as the Sustainalytics' approach does not penalise or favour any industry versus another, it does begin to make sense when taking into account other considerations.

Author of the research, and director, manager research ratings at Morningstar, Kathryn Young, said: "The correlation makes sense when you consider that Sustainalytics' process is based on the performance of any given company relative to that of its global industry peers".

"In general, Australian banks score well relative to their global peers because they exhibit better ESG performance and they have had less involvement in controversial incidents, such as lending to groups that engage in illegal activity," she said.

However, this correlation did not apply to large-cap global equity funds.

On the other hand, Australian companies in the healthcare sector scored a bit worse than their global industry counterparts, meaning that funds with greater exposure to healthcare had slightly lower ratings (but this was not the case with global equity funds).