For the first time in its history, the war in Ukraine is triggering fundamental questions about funds associated with the environmental, social, and governance (ESG) industry and its presence in Russia and China.
Following Moscow’s invasion of Ukraine—and China eyeing Taiwan—ESG fund managers are feeling a sense of consternation in this environment, industry observers say.
It’s estimated that ESG funds had more than $8 billion in Russia prior to the country’s military incursion. In addition, European ESG funds have about $130 billion invested in China, the world’s second-largest economy.
However, the global investment sector might be assessing its assets a little bit differently moving forward.
Although the financial blows of ESG investing in the Eastern European nation have been cushioned, the pecuniary plight in China is more challenging. China is a massive market, but its lackluster response to the worst military conflict in Europe since World War II is leaving some asset managers befuddled and cautious.
For now, ESG fund managers and investors are keeping a close eye on the Chinese Communist Party’s (CCP) relationship with Russian President Vladimir Putin and the Kremlin. Despite calls for peace in the region, Beijing has made moves and released comments that suggest it’s on the side of Russia, noting that it doesn’t want to threaten its strategic relationship with the world’s largest energy exporter.
When the International Court of Justice voted to require Russia to halt its military operations in Ukraine immediately, China joined Moscow in dissenting.
Chinese Foreign Ministry spokesperson Wang Wenbin noted last week that Russia should be allowed to attend the next G-20 summit.
“No member has the right to remove another country as a member. The G-20 should implement real multilateralism, strengthen unity and cooperation,” Wang said.
At the same time, China’s state-run Sinopec Group reportedly suspended discussions for a significant petrochemical investment and a gas marketing venture in Russia. Moreover, the Asian Infrastructure Investment Bank, headquartered in Beijing, emulated the World Bank’s decision to stop its $1.1 billion approved or proposed activities pertaining to Russia and Belarus. China has also refrained from sending aircraft parts to Russia, forcing Moscow to search for alternative sources.
Despite these developments, Russian Foreign Minister Sergey Lavrov has reaffirmed the government’s relationship with China, calling it more robust than ever.
And Russia–China relations are what could prompt questions surrounding ESG funds and their principles, experts say.
Industry experts say ESG is incompatible with authoritarian regimes. However, Paul Clements-Hunt, founder of advisory firm The Blended Capital Group, told Bloomberg that ESG fund managers and investors have “failed.”
“ESG is being used ineffectively,” Clements-Hunt said. “The obsession with easy money-making is overriding everything.”
In recent years, BlackRock has significantly increased its focus on ESG investments. However, the U.S. fund manager has been criticized for investing in Chinese enterprises that aid the Chinese regime’s military and security forces, as well as its human rights violations.
Considering China’s economic connections to the rest of the world, fund managers believe it could be more challenging to divest from the $16 trillion economy.
In the end, both ESG and non-ESG funds might reassess their investment decisions overseas, according to Samuel Adams, CEO at Vert Asset Management.
“I think all managers, not just ESG managers, will be revisiting whether investing in Russia and China are worth the risks,” Adams told The Epoch Times.
But there’s a sort of loophole for the ESG realm, according to Hortense Bioy, Morningstar’s global head of sustainability research.
“There are still people who inappropriately conflate sustainability and ethics,” Bioy told Bloomberg. “Sustainable and ESG funds aren’t the same as ethical funds.”
This is why ESG funds can maintain diversified portfolios that park capital in weapons manufacturers and crude oil producers.
A recent report from CIBC Capital Markets suggests that ESG funds aren’t placing enough emphasis on social and governance. This led analysts to scoop up shares in Russian energy firms late last year.
“In evaluating ESG risk, however, carbon should not be the only variable to consider. Unfortunately, this doesn’t appear to be the case. Tesla is one of the most owned equities within the ESG universe given its environmental performance, yet the company certainly leaves room for improvement on both governance and social issues (Elon Musk is quite anti-union),” CIBC analysts wrote in a note to clients.
“In the most shocking example we have come across to date, the ESG fund universe owned twice as much Russian oil and gas as Canadian oil and gas at the end of last year.
“Clearly, the concept of aligning investments with the values and ethics of responsible corporate citizens was significantly outweighed by simple, backward-looking carbon metrics.”
In recent months, ESG funds have also come under intense scrutiny, with accusations that the sustainable investment community is greenwashing companies’ practices and not spotlighting authentic ESG investing.
Financial regulators say that the industry must adopt standardized criteria that organizations need to heed before installing ESG tags on their investment products.
Last year, the European Securities and Markets Authority (ESMA) stated that misleading terms without any legal definition, such as “green hedge,” are too pervasive.
“Similar to ‘ESG derivatives,’ new expressions such as ‘green hedge’ are primarily intended for marketing purposes without any legal meaning,” ESMA wrote in a report. “This contributes to investor confusion and greenwashing risks.”
In December, UBS suggested that companies, particularly in China, need to disclose their ESG standards better.
“Sustainability considerations are growing in importance for both companies and investors in China with performance being derived from a company’s environmental, social, and governance (ESG) metrics,” the Swiss investment bank stated. “A core aspect of sustainability also involves assessing the quality of a company’s management and its ability to orient the business away from material risks, toward opportunities.”
JPMorgan Chase shared this sentiment in a report about challenges surrounding the dissemination of ESG data.
“There is a rising awareness of ESG issues, and although such issues are generally not currently driving investment decisions, we expect them to play more of a role in the future,” the Wall Street titan stated.
Global ESG assets are forecast to surpass $53 trillion by 2025.