Boot Chinese Stocks From ESG Funds, Former State Department Official Says

A former undersecretary of state for economic affairs and CEO of DocuSign, Keith Krach, is on a mission to divest Chinese stocks from funds restricted to companies that meet environmental, social, and governance goals. In recent years, such ESG funds have become flooded with capital as investment funds, endowments, and others have been pressured to focus on the societal impact of their investments in addition to getting financial returns for their investors. According to Mr. Krach, when they started 15 years ago, ESG funds represented about $17 billion in funds; today they represent about $40 trillion. Chinese companies, he argues, should not be deemed ESG-compliant. “If you think about applying the standard with integrity,” he said, “they all should be excluded for three reasons — E, S, and G.”On governance grounds alone, he says, “all Chinese companies are disqualified on the lack of transparency. … They don’t use general accounting rules. You cannot audit their books. There is no equivalent to Sarbanes-Oxley.”Congress recently passed legislation designed to force Chinese companies off the American stock exchanges if they don’t comply with audit rules. Accounting standards are only one issue, though. In terms of the environment, Mr. Krach argues, Chinese companies “are the world’s worst polluters.” The Chinese “talk a good game, but they use dirty, unregulated coal in their energy-intensive manufacturing process.”Also, with respect to S, the social, these companies are implicated in slave labor, and genocide, Mr. Krach says. That is true for many companies throughout China, he argues, not just those based in Xinjiang because the CCP ships Uyghur workers throughout China.For these reasons, Mr. Krach argues, it is completely hypocritical to call these Chinese companies ESG-compliant. A new case study taught at Wharton business school examines this question, using the example of Chinese solar panel companies. Yes, the authors write, solar is good for the environment, but how does one balance that against other problems associated with these companies. The case study notes that Chinese solar panels are largely produced in Xinjiang, where the Uyghur genocide is taking place, and many of these companies, if not all, are likely implicated in the use of forced Uyghur labor. “It’s time to clean up ESG,” Mr. Krach says. More broadly, he believes giving these Chinese companies access to American capital markets is a bad idea. On top of the fact that there is no transparency for investors and so many of these companies are involved with the CCP’s surveillance state and the genocide against Uyghurs, many of these companies are also involved in military development. For Mr. Krach, funding these companies therefore means that American investors are unknowingly financing Chinese military companies and the CCP’s human rights abuses. “What we’re doing is we’re funding the competition,” he declares. He argues that, for these reasons, even Alibaba, BaiDu, and Tencent should be removed from American capital markets. These companies, he says, are “the most important companies to China’s military AI program. And other than Huawei, they’re players no. 2, 3, and 4 in terms of perpetuating their surveillance state and enabling genocide.”Mr. Krach urges investors to take a closer look. “If you have a pension plan,” he says, “if you contribute to your university’s endowment fund, if you are invested in a mutual fund or ETF, see if they disclose their Chinese investments. Chances are those investments are not aligned with your values. If they won’t disclose this information, it may be time to find another place to invest your money.”

Boot Chinese Stocks From ESG Funds, Former State Department Official Says

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