Foreign investors in Chinese stocks have a problem. China’s growth brings hopes of big gains over the next decade, but environmental, social and governance ratings place Chinese companies not only below those in the West, but behind most emerging markets. Positioned.
The combination of the world’s largest consumer market and a rapidly growing technology and services sector is attracting global investors willing to look to censorship, surveillance, environmental, labor, and other human rights violations.
However, there are signs that ESG impacts are looming for Chinese companies and companies investing in Chinese companies. ESG ratings are becoming increasingly important to international investors, yet the sustainability rules and standards prevalent in Western jurisdictions are at odds with China’s reality.
In a move that hints at the challenges ahead, Sustainalytics, a sustainable rating agency owned by research firm Morningstar, put three Chinese tech darlings — Tencent, Weibo and Baidu — on its watchlist in October. It has been downgraded to the ‘non-compliance with UN principles’ category.
Simon MacMahon, Global Head of ESG Research at Sustainalytics, told the Financial Times:
“There was evidence of censorship and surveillance related to religion, LGBT rights, the war in Ukraine, and Covid-19,” McMahon said. I did.”
For Tencent, Internet Group has 1.3 billion monthly active accounts held by individuals and businesses, and its WeChat super app is not only for messaging, but also for shopping, banking, taxis, food delivery, utility bill payment, etc. It is considered essential for navigating everyday life. .
The company’s stock has plunged over the past 18 months on concerns over a regulatory crackdown on Beijing’s tech sector. However, the company remains a sizable chunk of foreign institutional investors’ China portfolios, and Sustainalytics’ downgrade has shocked some of his ESG-focused investors.
Ren Liqian, who manages China investments at WisdomTree Asset Management, a US-based fund, said she was one of those forced to let go of the company, and the 4th of the major China index. He said it brought in more than a quarter of trading volume.
“[If the companies] Our process requires us to sell this fund unless we claim it as ESG,” she said. “It’s a big part of the portfolio. ”
Experiences like this could become more common for investors in increasingly authoritarian China as Xi Jinping, the most powerful leader since Mao Zedong, embarks on an unprecedented third term in office. There are already discussions about whether China is too risky given the unpredictability of Xi Jinping’s administration in recent years.
Some experts have weighed the role of ESG in investment decisions in the wake of Russia’s invasion of Ukraine, amid complaints that sustainability considerations are fueling rising energy costs and hampering resource development. said that the tendency to increase is weakening.
However, the rating group Fitch said the ESG blow was a “short-term response to difficult circumstances” and the long-term outlook for increased allocation of public and private capital to sustainability initiatives was bleak. I think it remains.
Demand for ESG rating services is skyrocketing. Sustainalytics said he reported revenue of $76.8 million in the first nine months of the year, up 36% year over year.
And while China companies come under increased scrutiny, ESG calculations are engulfing multinationals and raising questions for investors as well.
Hong Kong Watch, a UK-based group that investigates investment and human rights issues in China, said in a November report that many of the largest wealth managers, public pensions and sovereign wealth funds have been implicated in the crackdown. said that it is passively invested in companies that A Uyghur Muslim who lives in the Xinjiang Uyghur Autonomous Region in northwestern China.
According to the report, three major stock indices provided by index publisher MSCI include companies that allegedly used forced labor or profited from China’s construction of concentration camps and surveillance devices in Xinjiang. At least 13 companies are included.
MSCI said the only filter for inclusion in the global index is “accessibility and investability” and has other ESG-focused indexes.
Foxconn, which makes iPhones and other devices for Apple, is among the companies Hong Kong Watch allegedly used Uyghur workers obtained through state-sponsored relocation.
The Taiwan-based company denied the allegations, saying in a response to the FT that researchers had been inconsistent in their analysis of its business. The company said it had submitted proprietary documents and information to Sustainalytics and his MSCI internal investigative group in response to allegations of forced labor in recent months.
“Despite reviewing the same information, each returned opposing assessments of Foxconn’s ESG efforts in November 2022,” the company said.
Human rights experts are unlikely to accept such a denial because China has cut off access to Xinjiang.
Chinese companies are less likely to engage in ESG issues than their Western counterparts, according to researchers and investors. About 60% of the companies Sustainalytics evaluates have answered the question, but in China that number is “pretty low,” he said.
While tech groups have been the focus of attention in 2022, the automotive sector is likely to gain increasing attention heading into 2023.
In December, the Helena Kennedy Center at Sheffield Hallam University released the results of a six-month study into links between Western car brands and human rights abuses among Uyghur Muslims.
Researchers said they documented involvement in forced labor transfer programs by 38 companies involved in the supply chains of Western auto brands.The companies were involved in sectors spanning mining, processing and manufacturing. , they said.
“The automotive industry cannot wait to trace its supply chain all the way back to raw materials. said principal investigator Laura Murphy.
