The exposure of ESG investors to Russia has already proved something of an (expensive) embarrassment (I wrote a little bit about it here).
And here’s some more on this question from Bloomberg (March 6):
Funds labeled ESG — an acronym that denotes a commitment to environmental, social and governance interests — own shares of Russia’s state-backed energy behemoths Gazprom PJSC and Rosneft PJSC, as well as its biggest lender Sberbank PJSC. The funds also hold Russian government bonds, providing money that ultimately helped pad the coffers of President Vladimir Putin’s autocracy….
Russia’s invasion of Ukraine is rapidly laying bare unexpected exposure in much of the ESG universe. Industry researchers at Morningstar Inc. estimate that 14% of sustainable funds globally held Russian assets right before the war. That’s as sustainable investing morphs into a $40 trillion industry embraced by the financial behemoths of Wall Street, where funds that track benchmark indexes are ubiquitous.
Russia is now being kicked out of that ESG universe.
Kiplinger (March 11):
The environmental, social and governance (ESG) rating firm MSCI downgraded Russia’s ESG Government rating this week, from B to the lowest rating possible, CCC.
Many ESG fund managers rely on MSCI ratings for portfolio construction and for ETF indexes. Thus, many Russian companies could end up being cycled out of funds that rely on maintaining a minimum ESG ratings bar for inclusion.
The B rating was itself a downgrading, dating from (checks notes) late February, which raises some interesting questions about the ways that these rating agencies are totting up their ESG scores.
Read on to find this:
A Bloomberg analysis found that only about 300 of 4,800 ESG funds held Russian companies. Bloomberg noted that several ESG funds invested in Russia in search of green or responsible companies to meet intense demand from investors. These ESG investors might have waived human-rights concerns to further goals like renewable energy.
Surely no one would waive human-rights concerns in the name of renewable energy?
Well, John Kerry might:
US special climate envoy John Kerry sidestepped a question about China’s use of slave labor during the COP26 UN Climate Change Conference on Wednesday, saying the issue was “not my lane.”
Kerry was responding to a query from a reporter who asked the former secretary of state if he had mentioned human rights issues — including Beijing’s “use of forced labor in Xinjiang for building solar panels” — during recent meetings with Chinese leaders.
“Well, we’re honest. We’re honest about the differences, and we certainly know what they are and we’ve articulated them, but that’s not my lane here,” Kerry said. “That’s — my job is to be the climate guy, and stay focused on trying to move the climate agenda forward.”
Oh.
And speaking of China, investment there must raise some ESG issues too.
Felix Boudreault, managing partner at research firm Sustainable Market Strategies in Montreal, said he’s been warning clients to stay out of Russia since 2018, and is now giving the same advice about China.
“As an investor, you have to consider not just the company, but the environment in which they operate,” Boudreault said. “And we are saying the same for China. It’s uninvestable from any ESG perspective. By a strike of a pen, a bureaucrat in Beijing can really kind of wipe out an entire sector like they did with education technologies recently.”
[Paul] Clements-Hunt [founder of advisory firm Blended Capital Group], who was among a group of ESG pioneers that included the now-deceased United Nations Secretary General Kofi Annan, said the answer is clear.
“If you don’t factor in autocracy and a malevolent government, then you have failed in your ESG assessment,” he said.
Boudreault’s advice came a little late, but, looked at from an ESG perspective (and not only that, but that’s a different topic), it is hard to disagree with what he and Clements-Hunt had to say. And if that’s the case, it’s also worth asking what (even beyond their ESG funds) some of our more preachy financial institutions think they are doing when they invest in China, whether through funds that they manage, or directly.
Meanwhile, Nir Kaissar, writing for Bloomberg:
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 had a weighted average allocation of 28% in U.S.-based emerging-market ESG stock mutual funds and exchange-traded funds at the end of last year, according to Morningstar. And China is no less concerning than Russia.
I’m not sure about that “in hindsight,” but there we are. And Kaissar’s broader point about China stands.
Among those preachy financial institutions putting, one way or another, money to work in China is BlackRock, the investment giant run by the holier-than-thou Larry Fink.
In an article that followed an earlier piece in the Financial Times (and which I discussed here), George Soros (yes, yes, I know) had a thing or two to say about BlackRock and China in the Wall Street Journal in September last year:
BlackRock, the world’s largest asset manager, has begun a major initiative in China. On Aug. 30 it launched a set of mutual funds and other investment products for Chinese consumers. The New York-based firm is the first foreign-owned company allowed to do so. The launch came just weeks after BlackRock recommended that investors triple their allocations in Chinese assets. This will push billions of dollars into China. “The Chinese market represents a significant opportunity to help meet the long-term goals of investors in China and internationally,” BlackRock Chairman Larry Fink wrote in a letter to shareholders.
BlackRock takes its responsibilities for its clients’ money seriously and is a leader in the environmental, social and governance movement. But it appears to misunderstand President Xi Jinping’s China.
“Appears to misunderstand.”
I hear the sound of a dagger being drawn from its sheath.
The firm seems to have taken the statements of Mr. Xi’s regime at face value. It has drawn a distinction between state-owned enterprises and privately owned companies, but that is far from reality. The regime regards all Chinese companies as instruments of the one-party state.
Fascism is a bit like that.
This possible misunderstanding could explain BlackRock’s decision, but there may be another explanation. The profits to be earned from entering China’s hitherto closed financial markets may have influenced their decision…
Ouch.
It’s well worth reading the rest of what Soros has to say.