Week 11: In the financial industry you must not speak about "you know who"

Dear all,?

To start this week, let me share a story with you.

Two birds are sitting on the roof of a house. One of the birds is singing and occasionally flying up in the air to land again, playful, the other bird is just sitting there, quiet and still. One day a hunter passes by, looks up and fires a shot and kills the singing bird.

That’s it. You get the point, right??

This week we journey into a topic, or rather a country, which the financial industry does not even like to mention when discussing ESG investments. Or, more specifically, when discussing the human rights side of the ‘S’ in ESG.

Do not mention “you know who”

In some financial institutions the people who work there are told not to mention “you know who”. Or rather, not to mention “you know who” in a challenging way.

It’s both peculiar and scary that an entire industry more or less consciously try to avoid the topic. Let me share an example which is rather telling.

The CFA Institute is a beacon of the financial educational curriculum, providing guidance and hands-on examples on how ESG can be integrated in “you know who”. I was thrilled when I started reading a hefty document of theirs, 96 pages, with the UN PRI logo on the front page as a co-author. The report was published in 2019.

I read it, it takes time, page after page. A couple of places in the document I found human rights mentioned as a topic under ‘S’ indicators, as good to know for investors. It even stands there, first on the list of potential good to know, almost most important issues.

Then I read again, trying to track it, and when I came to page 37, it said “Drivers and Barriers to ESG integration”.

I got excited. Ok, now finally something worth reading.

But… there was nothing. Human rights where still nowhere to be found. Gone, vanished, evaporated into thin air.

Instead I found this:

“CFA Institute and PRI thank The Asset Management Association of China (AMAC) for supporting our ESG Integration workshops in China. With their assistance, we were able to work with investors and analysts to better understand the current state of ESG integration.”

There’s nothing wrong with this as such. It’s quite common, a cooperation with the aim to improve the state of investments. Yet it’s also rather strange.

We all know what is going on in the “you know who” country and today we must all understand the implications of us knowing and not really acting on it. The lessons from Ukraine are still fresh.

And still, we are complacent with all of it. Why? It’s pretty simple. It’s all about cash.

No, we are not bigger than that, and the crew running the “you know who” country is counting on us every day. We sort of provide a hand, directly and indirectly, through capital and deals, and then we read newspapers and watch news on crack-down on dissidents, disappearance of civil rights defenders, “educational-camps” for minorities, surveillance of a billion people, and then. Then what?

It’s a farce.?

You can find the ‘excellent’ CFA Institute (in collaboration with UN PRI) report here.

A people’s democratic dictatorship

The “you know who” country is ok to mention when we talk climate transition and investment opportunities related to the transition. But mentioning human rights abuses and governmental oppression of free press and civil rights activists, including mysterious disappearing of business executives, a tennis player, and so on, is a no-no in the financial community with its classification of billions of investments under the banner of Article B regulation (SFDR EU regulation).

Let’s starts with what “you know who” really is. The Constitution of the “you know who” country states that its form of government is a “people’s democratic dictatorship”. That is really what is says.

Modern “you know who” leaders state that they run a “socialist democracy” in which the “you know who” Communist Party is the central authority that acts in the interest of the people and approves which political parties can run.

During a visit to Europe in 2014, “you know who” general secretary Xi Jinping said that a multi-party system would not work for “you know who”. He said that “you know who” had experimented in the past with various political systems, including multi-party democracy, warning that copying foreign political or development models could be catastrophic because of its unique historical and social conditions.

Ties between “you know who” and Global Finance are growing, and the total value of the “you know who” stock market has hit record highs. More money is being invested in “you know who” by Western pension funds, sovereign wealth funds and other institutional investors than ever before.

On 14 July 2021, the Financial Times reported that global holdings of “you know who” stocks and bonds had surged about 40 percent to over $800 billion. The “you know who” government has been actively making it easier for institutional financiers to invest by removing investment quotas.

Simultaneously, some of the world’s largest investors are driving the push for increasing capital flows into the “you know who” country. For example, Blackrock, the world’s largest asset manager, has been a vocal advocate of greater investment into “you know who”. In August 2021, the firm called for “you know who” to no longer be considered an Emerging Market but instead for the country to be placed in a separate category and for equity portfolio allocations of investors into “you know who” country to increase to two or three times their current size.

Paradoxically, the rising investments into “you know who” coincides with, as we all know, the boom in ‘Environmental, Social and Governance’ (ESG) investing!

As part of their ‘social’ duties, many asset manager and asset-owners, have signed up to the United Nations Guiding Principles on Business and Human Rights (UNGP), acknowledging that they have a duty to respect and protect human rights in the contexts where they are investing. It sounds noble and nice and important.

Many currently argue that there is no conflict between their “you know who” portfolios and their ESG priorities. But this view can certainly be challenged.

There are three areas which should be of considerable concern to firms seeking to meet their ESG commitments: Human Rights, National Security and the Environment.

The first one, human rights, is not addressed at all by ESG investments in the “you know who” country.?

Human Rights & ESG investments in “you know who”?

In practice, most of the attention of ESG investors has been placed on environmental costs, with little attention given to human rights.

Financial firms are particularly reticent about engaging with human rights in “you know who” because of their desire to capitalize on a growth market. The result of this has been that there has been considerable investment into “you know who” firms which have troubling human rights records.

There is a clear knowledge gap between financial professionals who know that enormous amounts of the money of ordinary people, institutional investment, pensions and government funding is being invested in “you know who”, and the members of the public, media and policy makers who would have serious ethical and practical reservations about what seems to be a reckless and problematic course of action.

This information gap has provided space for financial institutions to pursue profit without regard for the social impacts of their ties with firms that are closely affiliated with human rights abuses in Hong Kong or Xinjiang (and other parts of “you know who”).?

The closure of Apple Daily, the mass arrests of the democratic movement, and the passage of the National Security Law combine to form the greatest ever blow to fundamental rights and freedoms in Hong Kong. Part of the reason that human rights in “you know who” has been neglected by investors is because of challenges associated with properly factoring human rights into ESG calculations.

The social dimension in ESG is generally understood to be comparatively more difficult to quantify than environmental risks which can be calculated using big data.

The result of this is that the ‘S’ in ESG, and particularly human rights, can be willfully or willingly neglected.

What can be done??

Again, the lessons learned from the Russian invasion of Ukraine should be obvious. If not, I listed the five main lessons in last week’s newsletter.

(BTW: I don’t know if I can use the word “invasion” here, but I hope it is ok. Or shall I call it a “conflict” just like many financial institutions have instructed their employees to call it?)

But let’s look at what can be done, for real:?

• Investors need to identify the specific social issues, including human rights issues, that are material to the geography or jurisdiction in which an investee company operates, and then by each sector or industry. Issues may become material with time and very costly.?
• Developing in-house capacity on ESG topics such as human rights is a crucial step for creating a competitive advantage in an increasingly competitive market. Building in-house capacity to better understand human rights indicators will improve your ability to interpret and use ESG data for risk management and capital allocation.
• Data availability will keep improving due to technological and policy changes. Many investors can also help influence data availability and quality by creating a demand for different and additional data points, human rights related data, from the ESG data providers and for improved disclosures from companies.
• When there is no data available, you must question why that is the case. Investors can take on a more active role by requiring, or recommending, that companies obtain or report some of the missing data on human rights actions.

An important shift coming soon?

In October 2020, UN PRI released a new report entitled “Why and How Investors Should Act on Human Rights”. Amazing, right?

This report from PRI – a global organization with over 3,000 signatories and more than $103 trillion in assets – highlights the growing demands of stakeholders (employees, beneficiaries, clients, governments and the wider society) for investors to consider various human rights issues in their decision making.

This places the UNGPs at the heart of the ‘S’ of ESG, and with many leading global investors co-signatories, potentially lays the groundwork in principle for an important shift.

PRI’s follow-up report in 2021 should make essential reading on why investors can and should act to incorporate the UNGPs at the heart of their strategies.

Let’s hope these are positive signs of what’s to come and that we might soon be able to finally call “you know who” by name and address its many serious human rights violations and issues.

The “you know who” country is here to stay, but so are responsible, sustainable ESG investors.

The question is how we move things forward given what we know – and given the complexity of the tasks at hand.

Best regards, Sasja

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PS: Here are some examples of complex calls for ESG investors in the “you know who” country:?

Dahua technology

Dahua Technology, headquartered in Hangzhou, Zhejiang Province, is one of the “you know who” country’s largest artificial intelligence companies. As of 2019, it occupied the second largest share of the global video surveillance equipment and service market, with an annual revenue of US$3.7 billion. The company has 16,000 employees. The company has been heavily involved in helping construct the surveillance infrastructure and camps that over a million Uyghurs are currently incarcerated in. Leaked screenshots of Dahua platforms and codes have found a user guide for a service targeted at “you know who” law enforcement clients which can send a warning when its cameras detect someone it identifies of Uyghur ethnicity, as a well as a consumer-facing camera which offers to sort individuals by race (Bhuiyan, 2021). Dahua has also been accused of being one of several companies participating in trials that use AI and facial recognition software to detect the emotion of Uyghurs. These cameras are alleged to have been installed in police stations in Xinjiang (Wakefield, 2021). In March 2021, the Federal Communications Commission in the USA warned that Dahua’s telecommunications equipment and services have been found to pose an unacceptable risk to U.S. national security or the security and safety of U.S. persons (Griffin, 2021). In October 2019, the company was added to a US entities list barring investment, and in June 2021 it was added to a US sanctions list (Swanson and Mozur, 2019).

iFlytek

iFlytek is one of the largest voice technology companies in the world valued on the Shenzhen Stock Exchange at $10.8 billion. iFlytek’s technology is integrated into WeChat allowing users to send around 6 billion voice texts in a day according to 2017 figures. According to the company’s annual report in 2019, around 60 percent of its profits come from “projects involving government subsidies.” These include an “intelligent criminal investigation assistant system,” as well as big data support for the Shanghai city government (Hvistendahl, 2020). In 2020, iFlytek revealed that it had received 1.4 million yuan in subsidies from the “you know who” government (Kawase, 2020). As with other technology companies of its size, the chairman of iFlytek, Liu Qingfeng, is a delegate to “you know who’s” National People’s Congress. Speaking at last year’s party gathering, the Chairman called for AI to be used to raise “you know who” out of poverty (Dai, 2020). US academics have cited iFlytek as one of the companies at the heart of “you know who’s” military-civil fusion strategy, citing evidence that the company has actively promoted its products to the People’s Liberation Army (Hvistendahl, 2020). iFlytek also jointly runs a speech and language research laboratory with Xinjiang University (Fritz, 2021). In 2017, Human Rights Watch reported that iFlytek has been working with the Ministry of Public Security to build a national voice pattern database. The ministry chose Anhui province where iFlytek is headquartered, as one of the pilot locations (HRW, 2017). It has been reported that Uyghurs in Xinjiang are required to regularly provide voice recordings alongside with DNA, biometrics, and fingerprints at police check-points, where they use iFlytek’s software (Byler, 2019). In March 2020, the Massachusetts Institute of Technology broke off a relationship with “you know who” voice recognition firm iFlytek after adopting tighter guidelines on partnerships (Murgia and Shepherd, 2019). This followed an announcement by the US Government that it would place the company on an entities list banning investment (CSIS, 2019).

Hikvision

Founded in 2001, Hikvision has been a supplier to hundreds of government- led surveillance projects in major cities including Shanghai, Hangzhou and Urumqi providing facial recognition cameras and biometric software. Around 42 percent of the company is controlled by “you know who” state-owned enterprises, with “you know who” Electronics Technology HIK Group owning 39.6 per cent of the company as the biggest shareholder (Deng, 2019). Human Rights Watch has found that Hikvision is one of the principal “you know who” companies involved in the construction of “you know who’s” surveillance state and the camps that house over a million Uyghurs in Xinjiang (Buckley and Mozur, 2019). The Financial Times reported in 2018 that Hikvision’s facial recognition cameras were to be placed at 967 mosques in Xinjiang (Feng, 2018). Reuters news agency also recently revealed that Hikvision has registered patents for facial recognition cameras that ‘can detect, track, and monitor Uyghurs’ going as far back as 2017 (Asher-Schapiro, 2021).

Hikvision’s complicity in human rights abuses in Xinjiang is particularly problematic. In 2017, Hikvision entered into five public-private partnerships with the authorities in Xinjiang, worth a combined total of approximately CNY 1.86 billion. The projects involve the production, installation, operation and maintenance of surveillance systems. The company confirmed the projects in its half-year report for 2019, which it has committed to operate and maintain for a period ranging from 11-21 years.