Large-cap Australian equity funds with higher weightings to the financials sector tend to have higher sustainability ratings, according to Morningstar.
Research house Morningstar has released its observations based on a partnership with global ESG ratings firm Sustainalytics, first announced in August 2015.
Morningstar Australia is currently producing sustainability ratings for 2,645 equity vehicles, including unlisted trusts, ETFs, listed investment companies (LICs), superannuation funds and allocated pensions.
Sustainalytics assigns a rating out of 100 to companies based on 70 ESG factors. Morningstar also deducts from the score based on 'controversies'.
The company ratings are used by Morningstar to rate portfolios on a sustainability basis, giving each investment vehicle a score ranging from one to five 'globes'.
Morningstar Asia-Pacific's managing director for research strategy, Anthony Serhan, said exposure to financials could be the contributing factor when it came to understanding why some Australian large-cap portfolios had a higher sustainability rating than others.
According to an Australian Landscape Report on the sustainability ratings by Morningstar manager for research ratings, Kathryn Young, there is a "slight relationship" between the sustainability rating for large-cap Australian equity funds and their exposure to the financials sector.
"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," Ms Young said.
There is a "similar but opposite correlation" that appears to exist for exposure to healthcare stocks among large-cap Australian equity portfolios, she said.
"On average, Australian companies in the healthcare sector score a bit worse than their global industry peers," Ms Young said.
"As a result, there is a slight relationship between exposure and sustainability rating: funds with higher healthcare exposure have a small tendency toward lower ratings."
Mr Serhan said the positive and negative correlations for financials and healthcare stocks highlighted the limitations of Australian equity portfolios.
"That is one of the factors of the global system – in Australia if you’re running Australian equities you can’t go and buy high-scoring pharmaceutical stocks. You’re stuck with what’s there," he said.