The Fine Line of Exclusions

    Stockholm (NordSIP) – Earlier this week, media reports flagged investments by asset manager Northern Trust Asset Management (NTAM) in Hangzhou Hikvision Digital Technology – a Chinese company complicit in the persecution of the minority Uyghur Muslim population in China. The issue is particularly relevant in Sweden, as some of these investments appear to have been made on behalf of public pension fund AP4.

    Although the asset manager is reconsidering these holdings, this case highlights the fine line that investors and asset owners need to thread in evaluating their exclusions. Despite ESG analysis and the nuances of engagement, investors may still be left facing anachronistic and difficult choices.

    The Uyghur Persecution

    The Uyghurs are an ethnic minority Muslim group of Turkik origins native to the Xinjiang Uyghur Autonomous Region (XUAR), which has been a part of China since the Uyghur Khaganate in the 8th century. According to 2015 estimates, there were approximately 11 million Uyghurs in XUAR.

    Legend: XUAR; Source: Wikimedia Commons

    Starting in 2014, two years after the rise of Xi Jinping to power as General Secretary of the Communist Party of China, reports began to surface regarding the state persecution of Uighurs in China. The state reaction against the ethnic minority seems to have been triggered by terrorist attacks in Yecheng in February 2012 and Tiananmen Square in October 2013, among others, which were associated with the ethnic minority.

    According to an August 2018 letter from the US Congressional-Executive Commission on China to US Secretary of State Mike Pompeo and Treasury Secretary Steve Mnuchin, the Chinese state’s reaction has included “the detention of as many as a million or more Uyghurs and other predominately Muslim ethnic minorities in ‘political re-education’ centres or camps.”

    The treatment, incarceration and re-education of the Uyghurs have continued despite global outrage. The fact that many other countries – including Muslim nations such as Saudi Arabia, Syria, Pakistan, Oman, Kuwait and the UAE –  have publically expressed support for China’s struggle to deal with terrorist, has not aided the cause of the struggling ethnic minority.

    The Role of Hikvision

    Capitalising on these reports, the US Congressional-Executive Commission on China recommended that “no Chinese official or business complicit in what is happening in the XUAR should profit from access to the United States or the US financial system.”

    However, the issue for Hikvision comes later when it is explicitly mentioned as a target for sanctions by the Commission. “We also urge consideration of sanctions (…) against entities assisting (…) officials in mass detentions and surveillance of ethnic minorities, including Chinese companies like Hikvision and Dahua Technology that have profited greatly from the surge in security spending, reportedly winning upwards of US$1.2 billion in government contracts for large scale surveillance projects.”

    Hikvision was subsequently added to the sanctions list of the US in October 2019.

    NTAM and AP4’s

    This issue is relevant to the Nordic investment industry because of the connection of AP4 to Hikvision through NTAM. According to a NTAM interim report, the asset manager owned 654,536 shares in Hikvision worth US$2.9 million, at the end of September 2019 (via its Emerging Markets Index fund, All Country Asia (ex-Japan) Custom ESG Equity Index Fund, Emerging Markets Quality Low Carbon Fund and its  Emerging Markets Custom ESG Equity Index Fund). The problem for AP4 arises from its participation an earlier version of the Emerging Markets Quality Low Carbon Fund, which it reportedly seeded in 2013.

    Responding to inquiries by NordSIP, a representative of NTAM commented that its “sustainable investing funds, including the NT Emerging Markets Quality Low Carbon Fund, utilises established third party data/research firms to provide ESG data and ratings, and flag ESG risks used to define investable universes or custom benchmarks.”

    “In the NT Emerging Markets Quality Low Carbon Fund’s screening process, a stock needs to have a red flag (severe risk) from the MSCI ESG Rating in order to be screened out,” the spokesperson for NTAM added. “Hangzhou Hikvision Digital Technology was deemed a moderate risk by MSCI and is under ongoing review.”

    According to MSCI ESG Ratings, in May 2019 Hikvision was upgraded from a “Laggard” “B” rating to an “Average” “BB” rating among its 69 peers in the electronic equipment, instruments & components industry. The rating noted Hikvision as an ESG “Leader” in the field of chemical safety, “Average” with regards to corporate governance, labour management, opportunities in cleantech and corruption & instability and a “Laggard” with regards to controversial sourcing.

    “In the case of Hikvision, the NTAM ESG team actively engaged with ESG research providers to assess the situation,” NTAM added. “Throughout that time, as well as during our heightened ongoing monitoring of Hikvision, EOS at Federated Hermes, our engagement provider for the fund, used the Northern Trust Engagement Policy, which strongly emphasises human rights, to engage directly with Hikvision management.”

    “Our approach is flexible enough to give us an opportunity to exclude securities from our portfolios if the engagement avenue and ESG flags coincide,” NTAM notes. “We are gathering information from the last engagement cycle before making a decision on Hikvision at the next portfolio rebalancing,” the asset manager concludes.

    Tough Choices in Ethical Investing

    In our present rush to address the climate crisis, it is not surprising to find cases where Human Rights take a back seat. The emergency of climate change and asset managers’ fiduciary duty to find returns for their investors can easily cloud out other concerns. However, it would be surprising to find that Swedes contributing to AP4 are comfortable with this investment.

    Sadly, the issue is not as clear cut. Much as the USA’s present policy on climate change can be awkward for investors seeking to blacklist polluting energy sources, America’s policy of mass incarceration and family separations at its southern border can be problematic for human rights activist investors too. It is very discouraging to realise that the following excerpt from the Congressional Commission could very well be applied to describe the USA: “There have been recent reports of deaths in custody, including suicides, in Xinjiang, and the Chinese government shows no sign of halting these rights violations. There is also evidence of an accelerated campaign to build additional detention facilities.”

    Yet, given the centrality of the US Dollar as the reserve currency of the world, it seems unlikely this will drive a sell-off in US Treasuries by sustainable pension funds. Presumably, the main difference is that China, much like Saudi Arabia, and certainly Hikvision, are not as central to the global economy as US government bonds. This relative irrelevance presents investors with an opportunity to act that is sadly not present when considering US government bonds. But if this is the new course, then we should be consistent and cast a wider net that may also include Sony and Sharp, to cite only two companies involved with Hikvision, according to reports by Japan times.

    Perhaps the issue was best put by Emelie Westholm, head of responsible investments and corporate governance at Folksam, at the recent PRI Nordic Forum in Stockholm this week. We ought to not “just focus on climate. Don’t forget about human rights and corruption.”

    Image by Steen Jepsen from Pixabay

    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

    Latest Posts

    partner insights

    From meat-based to plant-based

    Cutting meat consumption is by far and away the most important dietary change we can all make to help combat climate change. It will also have a positive knock-on effect for biodiversity.

    Find out more >