By Johnny Patterson
The sharp disparity between the rhetoric of investors about ESG and their actions relating to human rights deserves greater scrutiny.
The majority of investors rightly state in their Governance and Sustainability guidelines that they expect all the firms they invest in to comply with the United Nations Guiding Principles for Business and Human Rights. The major players are part of the UN’s Principles for Responsible Investment network which set new human rights expectations for investors in October 2020.
But there has been little success in properly laying out how firms can be compliant with these expectations, either in regulation or in practice. It is easy to measure and model algorithmically the cost of long-run environmental damage. It is harder to put value on a human life and the damage that investing in a firm which uses slavery in its supply chains can do. But if ESG is to be a meaningful concept, the ‘S’ also needs to be meaningfully quantified.
China exposes is a high profile example of the problem. Blackrock recently called for investors to triple their holdings in China and will have been cheered on in this by many of their industry peers. Yet, there has been little discussion about the fact that billions of dollars of public investment around the world are being funnelled into firms including China’s technology giants which are known to have helped facilitate the creation of the Xinjiang surveillance state, China’s solar industry where Uyghur forced labour is almost undoubtedly prevalent, state-owned banks which bankroll many of the most problematic companies, and oil and gas companies like CNOOC and Sinopec.
This issue is not exclusive to asset managers. Consider the New Zealand Superannuation Fund which is New Zealand’s sovereign wealth fund. Founded in 2001, it has over NZ$59 billion under management. The fund states on its website that it ‘must invest in a manner that does not damage New Zealand’s reputation as a responsible member of the world community.’ The New Zealand Supernation Fund points out that it one of the first investors to sign the United Nations Principles of Responsible Investment.
Yet a Hong Kong Watch report found that, in 2020, the fund was invested in 14 Chinese companies which American investors have been barred from investing in due to their ties to the People’s Liberation Army or gross rights violations. When pushed on this recently by some Members of Parliament in New Zealand, the fund wrote a letter in reply, which Simon O’Connor MP the author of the original letter shared with me, that stated that they had divested from some of these stocks. That might seem like progress, but they proceeded to explain that they had only divested because the firms had been removed from the MSCI index which their fund tracked following Biden’s investment ban on certain firms. They then doubled down on why they continue to have holdings in iFlytek and Zhejiang Dahua technology – both of whom have developed surveillance technology used to oppress Uyghurs and face trade sanctions from the United States. It is not a great look for a fund so closely linked to the New Zealand Labour government.
What is interesting about that interchange is that regulation must have a role in driving change in investor behaviour. MSCI divested because of the Biden investment ban list, and this then shaped the behaviour of the New Zealand Superannuation Fund, a pension fund on the other side of the world which is evidently disinterested in engaging with the ethical questions more widely. Regulators in Brussels, London and New York have a role to play in levelling the playing field so that institutional investors are not incentivised to fund oppression. A combination of designating no-go stocks on sanctions list alongside increasing the requirements for human rights due diligence reporting for institutional investors has provided a good start, and further regulation along these lines will help to level the playing field.
Yet, government intervention alone is insufficient. Without the financial services industry proactively confronting these issues head-on, progress will be stunted. Firms complain that they do not have enough information. This excuse might have held water ten years ago, but the UN Guiding Principles have been enshrined for years now. At a time when responsible investing is so much in vogue, firms must take this more seriously.
But there are rays of hope. Legal and General recently called out Apple for sourcing parts from factories which use Uyghur forced labour. Investor pressure around the issue of human rights due diligence – ultimately using both the levers of engagement and divestment – is absolutely essential if we are to see meaningful change. Asset managers and ESG professionals must be informing government policy and regulation to ensure that firms using forced labour are not receiving funding. There is growing awareness that capitalism can be a force for good. Human rights must be part of that story.
Johnny Patterson, Policy Director, Hong Kong Watch