As Canadian lawmakers meet to discuss the second anniversary of the introduction of the draconian national security law in Hong Kong, they will also consider the issue of Canadian pension funds passively investing in Chinese stocks and bonds linked to serious human rights violations.
Russia’s brutal invasion of Ukraine, reported well in advance, should serve as a wake-up call to Western pension funds about the risks of economic dependence on authoritarian states, including ideology and appetite for geopolitical risk differ widely from the democracies they compete with.
Many investors were optimistic the week before Russia invaded Ukraine, doubling down on their investments and remaining skeptical that the West could unite around economic sanctions and wean itself off its dependence on oil. and Russian gas. Yet the European Union’s latest agreement on a collective oil and gas embargo has further demonstrated how quickly those assumptions can change and how savvy investors like BlackRock can end up losing more than $17 billion from the money from ordinary pensioners.
By adopting an embargo, European leaders marked the end of an inconsistent approach by Russia, which arms Ukrainian soldiers but continues to finance Russian bombs through the purchase of oil and gas.
Such inconsistency is also found when it comes to dealing with Xi Jinping’s China. Canada and its allies rightly condemn the human rights crackdown in Hong Kong, detention camps in Xinjiang and military threats against Taiwan, but investors continue to invest passively in Chinese stocks linked to Xinjiang and the People’s Liberation Army, as well as increasing amounts of money in Chinese government bonds.
What conclusions should Xi Jinping draw when in May 2021 foreign ownership of Chinese government bonds hit an all-time high of over 3.6 trillion renminbi? After all, the purchase of these bonds directly funds the building of detention camps, the crackdown on national security in Hong Kong, and the militarization of the Taiwan Strait.
How does Xi feel about Canada’s willingness to defend Uyghur rights when Canada’s major federal, provincial and university pension funds are all exposed to Chinese stocks (like iFlytek and Dahua Technology) that have been blacklisted by the United States for its complicity in these gross violations of human rights?
A new report by Hong Kong Watch has revealed that despite a commitment to environmental, social and governance (ESG) criteria, the Canada Pension Plan Investment Board, the Civil Service Pension Fund of Canada, the British Columbia Investment Management Corporation, the Investment Management Corporation of Ontario, the Caisse de depot et placement du Quebec, the University of Toronto, the University of Alberta, Queens University and Alberta Investment Management Corporation, have all invested in Chinese stocks that have been blacklisted and in some cases sanctioned by the US government, as well as large holdings in Alibaba and Tencent.
Of course, this exposure to questionable stocks is not accidental, but unfortunately intentional. The federal, provincial and university pension funds named above all invest passively through index trackers, including through the MSCI Emerging Markets Index and the MSCI All Country World Index, which act as as “publishers” in creating the funds and selecting the stocks in which they invest.
This means that pension funds are effectively outsourcing investment decisions about Canadian retiree money to third parties who claim to be independent and neutral, but who are actively funneling billions of Canadian dollars into Chinese stocks and bonds with little or no oversight or transparency.
Such an approach is unsustainable and rightly leads Canada’s largest pension funds to face growing criticism from human rights groups over the way they invest and the how their investments in China meet past ESG commitments.
These groups were joined last year by senior figures in the financial sector, from Baroness Helena Morrisey in the UK to George Soros in the US, who warned of the “glaring paradox” between statements of respect ESG criteria and investments in Chinese companies. related to forced labor.
It would be wrong to categorically oppose investing in pension plans in China or ignore the work that some Canadian investors are undertaking to ensure that proper due diligence is undertaken. However, there remains a strong case for Canada’s major pension funds to review their approach to passive investing and ensure that investments in China are consistent with their ESG commitments.
Canadian lawmakers are currently debating modern slavery legislation that would require the government to audit supply chains and eliminate products used by slave labor, but there remains little regulation or oversight over slavery funds. Canadian pensioners who invest in companies that actively benefit from and, in some cases, are complicit in the expansion of slave labor in China.
How do international companies ensure their supply chains are free from modern slavery? This is a complex exercise, for which many companies would need expert advice. This is certainly our experience in promoting anti-human trafficking laws and regulations in Hong Kong. The Hong Kong Stock Exchange has taken the important step of including forced labor and unfair employment practices in the mandatory ESG disclosures required of companies listed on the HKEX. However, how can we go beyond a box-checking exercise to ensure companies are substantively compliant? This is the same challenge facing Canadian businesses.
This must change. Lawmakers should consider legislation that would prohibit investments in companies complicit in genocide, ethnic cleansing, crimes against humanity or modern slavery, while encouraging the government to review the ESG status of Chinese government bonds.
Otherwise, there is a risk that Xi Jinping, like Putin before him, will accept passive investment from Canada’s major pension funds in Chinese bonds and equities that Hong Kong Watch highlighted in its report as a green light for a new crackdown on human rights in Xinjiang. and Hong Kong, and prepare the Chinese army for war.