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BlackRock, ESG, and China — an Interesting Combination

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We’ve all become rather too used to hearing sermons from BlackRock’s Larry Fink on the importance of including ESG as part of every responsible investor’s toolkit.

ESG?

The idea that portfolio companies or potential portfolio companies should be analyzed to see how well they do when measured against various environmental, social, and governance guidelines.

It has always been entertaining to speculate just how BlackRock reconciles its enthusiasm for ESG with its excitement over investment in China:

The Financial Times (August 17):

BlackRock’s research unit [BII] has said China should no longer be considered an emerging market and recommended investors boost their exposure to the country by as much as three times.

And, in an unrelated development:

[BII’s] recommendations come as BlackRock and other big asset managers are seeking to build businesses in the sprawling country. BlackRock earlier this year received the first approval for a foreign asset manager to launch a wholly owned mutual fund business in China.

China is not, perhaps, a country with the greenest of credentials, not least when it comes to “climate,” a particular preoccupation of Fink, BlackRock’s chairman and CEO. Nor, thinking of that “S” (social), is China known for the good treatment of workers there even when they are paid. And it is difficult to regard Chinese companies as models of good governance (the “G”). Even if we overlook the fraud and all the rest, they are, under China’s essentially corporatist model, ultimately subordinated to the state.

George Soros, writing in the FT (my emphasis added):

Pension fund managers allocate their assets in ways that are closely aligned with the benchmarks against which their performance is measured. Almost all of them claim that they factor environmental, social and corporate governance (ESG) standards into their investment decisions.

The MSCI All Country World Index (ACWI) is the benchmark most widely followed by global equity asset allocators. An estimated $5tn is passively managed, which means that it replicates the index. A multiple of this amount is actively managed, but it also closely tracks the MSCI index.

In MSCI’s ACWI ESG Leaders Index, Alibaba and Tencent are two of the top 10 constituents. In BlackRock’s ESG Aware emerging market exchange-traded fund, Chinese companies represent a third of total investments. These indices have effectively forced hundreds of billions of dollars belonging to US investors into Chinese companies whose corporate governance does not meet the required standard — power and accountability is now exercised by one man [Xi] who is not accountable to any international authority . . .

This is all worth remembering the next time that Fink is up on his pulpit.

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