The exposure of environmental, social, and governance (ESG) investors to Russia has already proved something of an (expensive) embarrassment. In hindsight, ESG investors should have held Russia to the same standard as its companies, but it’s not too late to apply that lesson to other countries.
While Russia had a modest allocation in emerging-market ESG funds, China does not. Chinese companies at the end of last year had a weighted average allocation of 28 percent in U.S.-based emerging-market ESG stock mutual funds and exchange-traded funds, according to Morningstar. And China is no less concerning than Russia.
For all practical purposes, if any investment involves a stake in a company that is a major source of pollution, utilizes forced labor in its supply chain or enables human rights abuses in any way, and does not follow generally accepted accounting principles or cannot have its financial records transparently audited, it must not be considered an ESG investment.
SocialMany Chinese companies would also fail the social criteria of ESG, given their involvement in ongoing human rights abuses such as slave labor, and even genocide.
GovernanceLikewise, Chinese companies cannot qualify for the governance criteria of ESG.
Chinese companies aren’t transparent, they cannot be audited, they do not abide by consistent and reputable accounting standards, they are consistently corrupt, bribed, subsidized, and maintain flaky books at best.
ConclusionAt my last press conference as Under Secretary of State on Jan. 14, 2021, I relayed a strong message to the public:
Most Americans have no idea that their own money—held in pension funds, 401ks, and brokerage accounts—is financing Chinese companies that support the People’s Republic of China’s (PRC’s) military, security, and intelligence apparatus, as well as human rights abuses on an epic scale, such as those in Xinjiang …. [Your] fund manager should notify you if your investments are contributing to the Chinese Party’s military buildup, the surveillance state, and human rights abuses …. Ask them if you are exposed. If you are exposed, ask them the name of the companies, the amount and when you will be divested. Then ask them why they do not directly and clearly disclose to you. If [you] do not get a satisfactory answer, best to find a new fund manager.Not only the American investor, but investors around the world with stakes in China, need to realize they are under the unpredictable thumb of the CCP. That includes many who believe ESG protects them. It doesn’t.