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Corporate governance scores good but green ratings lacking

Emma Rapaport  |  24 Apr 2018Text size  Decrease  Increase  |  
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Australian companies have work ahead in boosting their green credentials, according to the latest Morningstar Sustainability Atlas report.

 

The report sheds light on environmental, social and governance (ESG) practices of Morningstar’s 46 equity market indexes, and puts Australian public companies in the top tier for governance -- a score that measures overall governance, including areas such as ethics and corruption.

 

"There’s some fantastic work being done in Australian companies around board structure, independence, remuneration and diversity,” Morningstar managing director, research strategy Anthony Serhan says. “We’re up there with the best companies in the world."

 

But while Australia is not the worst offender, it has been slower to act on climate change, carbon emissions, pollution, energy efficiency and water. 

"The US, for example, is well ahead of Australia in the production of alternative power sources including nuclear, solar, wind and tidal," Serhan says.

Australia also drew a red flag for its direct involvement in coal extraction, and indirect involvement with coal-fired electricity generation.

On governance, the big four Australian banks are all considered standard bearers within their global peer groups but the fallout from the Banking Royal Commission may influence their future rating, says Serhan.

"You can’t look at the allegations coming out of the Royal Commission and not surmise that there might be some revisions, but for a global report like this it’s really about identifying the best in class," he says.

"Wealth management is a small part of the Australian banking sector’s entire business, and overall they have avoided major fines from the global financial crisis and involvement with money laundering. Compared to global banks, Australian banks still come out above par."

Overall, the Netherlands continues to be the world's leading market, with Dutch companies distinguishing themselves in governance. South Korea, Russia, China, Qatar, the United Arab Emirates and Japan remain especially weak.

On the social front, which compares product safety, labour standards, and supply chain management, Australian public companies scored well.

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Outside of the major ESG scores, Australia continues to suffer from controversies related to the big four banks and the BHP mine dam collapse in Brazil in November 2015.

"We include a Controversy Score because companies can have all the rules and frameworks in place, but it doesn’t mean that everyone is going to drive between the guard rails," Serhan says.

"Controversy picks up that element, and Australian companies do have their share of incidents."

Serhan says individual investors can use the data to both inform their investment choices and to affect change in the financial services ecosystem.

"We want to empower investors to identify issues and make informed choices, and this data goes a long way to improving awareness and encouraging company transparency."

"Investors who care about a company’s ESG credentials can raise this with their portfolio manager, who in turn is more inclined to pass on such concerns to the companies themselves."

 

Morningstar sources its sustainability assessments from ESG researcher Sustainalytics, which assigns ESG Scores to 7500 companies and controversy scores to 14,000 companies.

The country indexes, which span developed and emerging markets, represent 97 per cent of global market capitalisation.

 

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Emma Rapaport is a Morningstar reporter, based in Sydney

 

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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