When Stuart Kirk, global head of “responsible investing” (think for a moment about the inanity of that title: What institution is going to admit to irresponsible investing?) at HSBC, a large bank, unwisely told the truth about the financial risk posed by climate change (in terms of typical investing and lending time horizons, it’s inconsequential) he was suspended, and senior executives took pains to distance themselves from the heretic. Kirk has now resigned.
At the end of an article that I wrote shortly after Kirk made his comments, I argued that his suspension was:
a perverse compliment of sorts. HSBC, which does a lot of business in China (that land of net-zero enthusiasts) is the bank that, in 2020, gave its backing to Beijing’s new security laws in Hong Kong and, more recently, has been asked by U.S. lawmakers why it has been freezing the accounts of activists working for democracy in Hong Kong, as well as those of independent media organizations and other groups.
Well, now for some more HSBC news.
The Financial Times (my emphasis added):
HSBC has become the first foreign lender to install a Chinese Communist party committee in its investment banking subsidiary in the country…
A CCP committee, which can be made up of several branches, is required by Chinese companies law but not yet widely enforced among foreign finance groups. It is typically formed of three or more employees who are also members of the Chinese Communist party. The committees serve a dual purpose as a workers’ union and the means by which a party representative is installed within a company’s top ranks, sometimes in a director or management role.
HSBC’s move will pressure other foreign banks to follow suit. Some have been examining whether they are required to do so after taking full ownership of their mainland securities and brokerage operations in the past two years, said several senior people at those institutions.
“It is significant in the sense of where [HSBC] is allocating its future,” said one of the people. “It is increasing its ties with an autocracy that clearly has views on how far it wants to reach into private companies. It is another brick in that wall.”
HSBC does, as I noted above, a lot of business in China, and has done for a long time (it was founded in Hong Kong in the 19th century) and, for so long as it has a presence there, it will have to comply with what passes for law in China.
Let’s turn to HSBC’s website and its section on ESG:
We are committed to building a business for the long term, developing relationships that last. We maintain high standards of governance and meet our responsibilities to society.
I, for one, am not entirely convinced that accepting the installation of one of these committees, the representatives, effectively, of a genocidal authoritarian regime, is entirely compatible with good governance. I’m not sure how it fits in with the “S” (social) of ESG, either.
HSBC denies there’s a problem (via the FT):
HSBC said in a statement that “[e]mployees of private firms in China are able to form a Party branch. These branches are common and can be set up by as few as three employees. It is important to note that management has no role in establishing such groups, they do not influence the direction of the business, and have no formal role in the day to day activities of the business.”
Normally, I’d believe that about as much as I once believed China’s promises to preserve Hong Kong’s (relative) freedoms, which, for the avoidance of doubt, was not all. However, maybe HSBC’s bosses are sufficiently trusted that in this case it’s true. Not all puppets need strings.
Meanwhile, back to the FT:
Seven global banks control investment banking operations in mainland China — HSBC, Goldman Sachs, JPMorgan, Credit Suisse, Morgan Stanley, UBS and Deutsche Bank — however, only HSBC has so far set up a CCP committee, according to multiple people familiar with the matter. The other banks declined to comment.
“There was an internal email that said we might need to do something, but for the time being . . . it is not yet compulsory,” said the Asia head of one international lender.
Executives of US banks are particularly worried about the optics of potentially exposing strategic decisions and client data to the CCP, several told the Financial Times.
Ah yes, the optics.
The FT:
A senior regional executive for a Wall Street bank said there had been a “longstanding understanding” with the China Securities and Regulatory Commission that most foreign securities or brokerage companies do not require CCP committees. Little behind-the-scenes pressure has been exerted so far, the person added.
However, China’s companies’ act states that “Communist party organisations shall . . . be set up to carry out activities of the party” within businesses, which “shall provide the necessary conditions for the party organisations to carry out their activities”.
“HSBC is on the right side of this one,” said another person with knowledge of its decision. “You don’t second guess the authorities in China. If they catch up they put you in the sin bin. Any American bank who isn’t doing the same is playing a dangerous game.”
Those banks are already playing a dangerous game by being in China. They should get out.
But in the meantime, when they, their investment management arms, or their affiliates, start talking up ESG, dismiss it for the hypocrisy that it is.
ESG, China: Choose one (or better, choose, neither).