Sustainability rules and standards among western investors clash with the realities of Chinese business
Faced with the rise of environmental, social, and governance (ESG) ratings, global investors are faced with a difficult choice between investing according to global sustainability standards and participating in potential big returns from the promised growth of China.
For as long as anyone can remember, foreign investors otherwise preoccupied with corporate social responsibility, going green, and people-centered core values have been willing to turn a blind eye on China’s censorship, pollution, and human rights abuses – among the many other problems regularly attributed to it.
But an “ESG reckoning” is just around the corner, the Financial Times reported. Morningstar’s sustainability ratings agency Sustainalytics recently downgraded three Chinese tech giants to “non-compliant with UN principles” – Baidu, Weibo, and Tencent.
Censorship and surveillance wound their way around critical issues such as LGBT rights, religion, the Russia-Ukraine conflict, and COVID-19, global head of ESG research at Sustainalytics Simon MacMahon told the Times, “[and] the scope and scale of the censorship and surveillance appeared to be increasing.”
Almost immediately upon hearing Sustainalytics’ findings, some investors were forced to drop the three companies. Liqian Ren, a manager of China investments at US-based WisdomTree Asset Management, told the Financial Times she turned over more than a quarter of the fund’s main China index as a result.
“[If the companies] become non-compliant, by our process, we have to sell – unless we just don’t claim this fund as ESG,” she said. “It’s a big part of the portfolio.”
On the other hand, Ren pointed out: “… the whole point of ESG is people taking a stance on some issues.”
Some experts have argued that the importance of ESG in investment has lessened, following the invasion of Ukraine and theories that green considerations drove up the cost of energy, the Financial Times reported. But Fitch Ratings countered that the slowdown in ESG investment was nothing more than a knee-jerk reaction to a challenging economic environment. The demand for sustainability initiatives would continue to grow.
Still, there may be more than one guilty party in China’s ESG indiscretions.
The first @MorningstarInc @Sustainalytics Voice of the Asset Owner survey reveals that many influential global #investors who consider #sustainability to be material to the investment process have not yet fully implemented #ESG in their portfolios: https://t.co/SdhW9JJK7c pic.twitter.com/Hz2EGrcgvt
— Sustainalytics (@Sustainalytics) October 6, 2022
Hong Kong Watch, a group that investigates investment and human rights issues in China, reported that many of the biggest asset management, sovereign wealth funds, and pension funds were passively invested in companies allegedly involved in the repression of Uyghur Muslims in Xinjiang.
Apple-device manufacturer Foxconn was supposedly among the companies that used Uyghur workers obtained through state-sponsored transfers. While the company denied the allegations to the Financial Times, the Chinese government has cut off all access to Xinjiang, making things difficult to believe – or to verify.
