Hong Kong now third most sustainable stock market as US ranks 16th and UK drops to 20th

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on Apr 17, 2023
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  • Hong Kong has overtaken France as the world's third most sustainable stock market.
  • The Netherlands ranks first, while Finland is second; the US and UK rank 16th and 20th respectively.
  • China is in 39th spot, while Pakistan has nearly 60% of index market cap in energy-related stocks.

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A recently published outlook for stock exchanges in terms of the global scores show the Netherlands is ranked as the world’s most sustainable stock market – the fourth year in a row and Hong Kong is now third after overtaking France. The USA and UK rank 16th and 20th respectively.

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Morningstar covers 48 stock markets that represent 97% of global market cap

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Investors looking to the best ESG-related stocks can look at the latest sustainability report for 48 national equity indexes recently published by Morningstar for insight.

It might be good for due diligence to note that risk is inherently high in the energy sector, which tops thanks to carbon risk and fossil fuels. Other economic sectors that have significant risk include utilities, industrials and basic materials.

Morningstar’s Portfolio Sustainability Score represents the country-specific index’s overall scores as measured across companies that make up the index.

The scoring covers both developed and emerging market that together account for 97% of the global market capitalisation.

Ranking only applys to a stock market if more than 67% of its market capitalisation is in companies that reflect environmental, social and governance (ESG) Risk Scores. Per Morningstar, the UAE market has the lowest score in ESG risk with 85.3% coverage.

Netherlands has most sustainable index, Hong Kong overtakes France into 3rd

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While Europe leads the way in terms of corporate-level sustainability as highlighted in Morningstar’s Sustainability Atlas, Hong Kong’s Hang Seng Index has overtaken France into third behind Finland.

The Netherlands tops the rankings thanks to ESG scores for companies such as the payment processing firm Adyen, global internet group Prosus and semiconductor sector giant ASML Holding. In Finland, it’s down to multinational telecommunications company Nokia and insurance firm Sampo among other companies.

Hong Kong’s move up the rankings from 2022 saw it overtake France, coming in third place as most portfolio names returned very low exposure to ESG risks. According to Morningstar, the AIA Group leads the benchmark.

French constituents with great ESG risk scores that have helped France remain among the top five in fourth include luxury brand LVMH, electrical equipment and engineering services provider Schneider Electric, and L’Oréal, a household name in the personal care sector.

The Taiwan Semiconductor Manufacturing Company (TSMC), which is a global ESG leader, has helped Taiwan rank fifth – up from 11th in 2022.  According to the Morningstar report, Portugal and Italy make up the top 10, ranked sixth and ninth respectively.

US ranks 16th with Amazon, Meta and Exxon holding high ESG risk ratings

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The Portfolio Sustainability Score for global indexes ranks the US benchmark 16th out of 48, unchanged from 2022. Meanwhile the UK index drops three places to 20th.

The US’ global sustainability ranking in the second quintile is helped by Apple, Microsoft, Berkshire Hathaway, Nvidia, Visa and UnitedHealth Group. While most companies are moving towards a more sustainability-focused approach, the ESG risk ratings Amazon, Meta, and Exxon Mobil are classified as high.

In other metrics, the US scores decently in the carbon metrics, ranking 19th out of 48 despite being the world’s second-largest for carbon dioxide emissions behind China. Per the report, only 4.6% of the index portfolio is energy stocks – which is the case with the American stock market massively dominated by technology, health pharmaceuticals, financials, and consumer cyclical stocks.

China scores poorly on sustainability as it ranks 39 out of 48 markets

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In China, market giants Tencent and Alibaba both have medium ESG risk ratings but are the largest components of the Chinese index. Industrial and Commercial Bank of China and Bank of China hold high risk levels, with China falling to the fourth quintile to rank 39th overall (the country index has dropped nine positions since 2021).

While Singapore ranks in the second quintile, Japan and South Korea are in the third and India is in the bottom quartile alongside other markets in the Middle East and Latin America. Eastern European’s emerging markets are also in this last group, including Turkey.

Pakistan has 60% of market cap in energy, utilities stocks

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Pakistan’s stock exchange has approximately 60% of market cap in stocks with high carbon risk scores. These include energy stocks, utilities, and basic-materials stocks. Other energy-heavy stock markets with substantial Portfolio Carbon Risk Scores are Saudi Arabia, Czech Republic, and Qatar.

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