China & ESG (Again)

Back in March, I noted a Reuters story to the effect that the Canada Pension Plan Investment Board, the country’s biggest pension fund, had said that directors of portfolio companies who presided over ESG “failures” should be asked to resign.

The move, the story read, was “aimed at ensuring that CPP’s portfolio companies are compliant with climate change, board gender diversity and corporate governance issues, which are high on investors’ minds.”

I wondered quite how highly these issues really weighed, not with professional investment managers but with those whose money they were managing.

I also noted that the CPPIB’s portfolio reportedly included investments (totaling around C$5 billion) in at least two Chinese companies.

This seemed like something of a contradiction. There were the pieties of ESG on one side, and yet there was the grubby reality of investing in China on the other.

Move forward to April, and an article in the Ottawa Citizen came out, in which the authors claimed that the CPPIB’s investments in China amounted to around C$57.5 billion, or 11.5 percent of the fund’s portfolio. Not only did the authors draw attention to the moral issues raised by an investment in China, but to the risks, not least those arising out of the growing intervention in the economy by Xi’s regime. They were right to do so. Under Xi, China has moved to a system of harnessed capitalism, under which any business active in the country is subordinated to the state, either actually or potentially, something neatly symbolized by the large number of quoted companies that in their by-laws provide for the establishment of party cells within their operations.

Move forward again.

Bloomberg (November 16, 2022):

The head of Canada’s $400 billion pension fund said he’s willing to cut ties with firms that aren’t committed to their net-zero [greenhouse gas emissions] targets.

While the Canada Pension Plan Investment Board doesn’t believe divestment is the right path forward, it will do so if other efforts fail, Chief Executive Officer John Graham said on a panel at the Bloomberg New Economy Forum in Singapore.

The writers of the Bloomberg report noted that CPPIB “has said it will consider voting against all directors at companies where there are oversight failures related to climate change, board gender diversity and deficient corporate governance.”

It’s not clear whether that last passage refers to CPPIB’s comments earlier in the year, or whether this was something that CPPIB is continuing to repeat. It was, however, interesting to read that:

Graham said CPPIB is “really excited” about investing in ESG, and sees it providing some of the best opportunities in the next 10 years. At the same time, the firm has moved away from using the term internally because “it’s three kinds of distinct areas that require its own discussion” and grouping them together “just simplifies it too much,” he said.

After all we have seen and learned about ESG in the last year or so, Graham’s excitement is bewildering, even if his latter point is fair enough. Bundling E, S, and G makes little sense. Indeed, there are circumstances in which the E and the S can conflict with each other.

However, whether alone or together, neither E, nor S, nor G is compatible with investing in China, and yet that’s what CPPIB continues to do.

Noting Graham’s comments, the Financial Post’s Matthew Lau tweeted yesterday that:

Those numbers (lower than those I cited above) may reflect only passive investments in China.

The Bloomberg Economic Forum where Graham was speaking was, incidentally, the same event where former British prime minster Boris Johnson’s remarks about China’s autocracy led Michael Bloomberg, a prominent ESG advocate, to apologize to anyone “insulted or offended” by Johnson’s comments.

Bloomberg’s timing, just days before the wave of protests now sweeping China was not . . . ideal.

Once again, ESG or China: Choose one (or better, neither).