A few weeks ago, I noted this story of yet another pension fund playing politics with other people’s money:
Canada Pension Plan Investment Board [CPPIB], the country’s biggest pension fund, said on Thursday that directors of its portfolio companies presiding [over] material environmental, social and corporate governance (ESG) failures should be asked to resign immediately. . . .
I also noted that CPPIB appeared to have some investments in China, and concluded as follows:
ESG. China. Pick one.
CPPIB’s investments in China were discussed in a recent article in the Ottawa Citizen by Phil Kretzmar and Margaret McCuaig-Johnston, in which the authors state that CPPIB’s investments in China are C$57.5 billion, or 11.5 per cent of its portfolio.
That’s not a small amount of money, nor is it a small percentage.
Kretzmar and McCuaig-Johnston would like to see Canada’s public-pension plans divest from China, both because of the ways the regime in Beijing has, in one way or another, given support to Russia’s invasion of Ukraine and, of course, because of the continuing genocide of the Uyghur people.
Those are clearly political and/or moral reasons for divestment, but the authors also make a strong economic case for why Chinese companies are a far riskier investment proposition than they were in the past:
While China provided good returns for many years, the risks under autocratic leader Xi Jinping are mounting. Chinese companies and markets do not operate under “rule of law” and are increasingly subject to regulatory interference. In the past year, many of the Chinese companies in which CPPIB has invested have lost considerable value due to sudden policy shifts. These include TenCent and Alibaba, which by size are the pension plan’s first and eighth-largest investments respectively. Inconsistent and arbitrary practices contribute to investment risk and in China these have been increasing, with continued uncertainty expected.
Reasonably enough, Kretzmar and McCuaig-Johnston also cite geopolitical risk, and, linked to that, the danger of “being held hostage by these investments in years to come.”
Before too long, there will need to be a great deal more discussion (and not, obviously, just in Canada) about the extent of the West’s economic relationship with China, a discussion that ought to cover far more than investment in Chinese securities.
In the end, however, when it comes to investments in such securities, portfolio managers will have to decide for themselves what to do, but they should not be allowed to escape criticism for putting them in funds where ESG is supposedly an important investment consideration (ESG is a “socially responsible” investment discipline which measures actual or potential portfolio companies against a set of environmental, social, and governance benchmarks).
To repeat my earlier comment, “ESG. China. Pick one.”