"Every time I say that I care about the Uyghurs, I'm really just lying if I don't really care," billionaire investor and former Facebook (FB) executive Chamath Palihapatiya said on a podcast earlier this week. "It's not a priority for me."
Immediately, his comments were met with a firestorm of criticism, with many expressing outrage at the indifference to a human rights abuse in China's westernmost Xinjiang province that is tantamount to genocide, per expert reporting.
His comments are not unique, however. Rather, they are merely a more honest reflection of recent comments by even more lauded investors such as Bridgewater Associates CEO Ray Dalio, who likened the repressive practices of Beijing's government to a "strict parent" in December, and Daily Journal Corporation (DJCO) frontman and Berkshire Hathaway (BRK.A) (BRK.B) vice-chair Charlie Munger, who outright lauded the Chinese government in some of its authoritarian policies.
However, in this era of socially responsible investing (SRI) and Environmental, Social, and Governance (ESG) principles that, rather obviously, would frown upon investing in industries reliant upon slave labor and genocidal practices the ignorance or even apathy towards these issues is growing stale.
Accelerating ESG Demand
First, it is important to put in context just what a game-changing trend ESG investing has shown itself to be.
Per Natixis Investment Managers, the total number of professional investors implementing ESG principles has risen by 18% in just the past three years, with three quarters of investors surveyed highlighting the guidelines as an integral factor in investment decisions.
The trend shows no signs of slowing down either, as institutional investors are the fastest growing adopters. In fact, a 51% increase in institutional investors exercising active ownership influence over corporate behavior under the auspices of these principles was noted in the same survey.
In short, conscientious investors are willing to put their money where their mouth is. The problem appears to lie in managers' willingness to forego promising investments should they conflict with these principles. This presents not only a major catch-22 for the likes of Palihapatiya and Dalio, but the big investors signing over large mandates to these managers.
"Talk is cheap, and I have always been suspicious that the ESG talk from prominent financiers was hollow," Fergus Hodgson, director of the financial consultancy firm Econ Americas, told Real Money. "The challenge for these men is that they both want to appear noble in corporate circles, but also want to profit from immense opportunities in China's centrally planned market. These investors will, therefore, come up with all sorts of mental gymnastics to gloss over and rationalize the plain truth that they are getting into bed with tyrants."
He added that it is not out of ignorance that these savvy investors make such statements, but fecklessness.
"These investors tend to be extremely intelligent men. That suggests they are either willfully ignorant or are willing to let go of integrity to make a buck," Hodgson said. "Many will do what is expedient for the bottom line, which often means pretending to care about ESG and other social movements while doing the opposite when no one is looking."
Backing Beijing
Perhaps nowhere is this disconnect more glaring than it is in the case of BlackRock (BLK) .
"Stakeholder capitalism is all about delivering long-term, durable returns for shareholders. And transparency around your company's planning for a net zero world is an important element of that," BlackRock CEO Larry Fink wrote in his 2022 letter to shareholders. "As stewards of our clients' capital, we ask businesses to demonstrate how they're going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies."
However, that thinking appears to end at the shores of China, where Fink has made clear his desire to increase exposure meaningfully.
"Our focus on investing for the long term and living our purpose is also reflected in the way we approach growing markets," Fink wrote in a recent letter to shareholders. "The Chinese market represents a significant opportunity to help meet the long-term goals of investors in China and internationally."
It would appear, therefore, that ESG concerns are not marking majorly into decisions in the region. After all, Chinese private markets are no longer clearly distinguished from the state apparatus, if indeed they ever were.
"Pouring billions of dollars into China now is a tragic mistake," hedge fund manager George Soros wrote in an op-ed for the Wall Street Journal last year highlighting this issue. "It is likely to lose money for BlackRock's clients and, more important, will damage the national security interests of the U.S. and other democracies."
To put it more bluntly, BlackRock and other trillion-dollar asset managers are currently pursuing a sort of schizophrenic strategy that at once espouses ethical and responsible investing while also lauding opportunities in perhaps the world's least ethical market. How long they can proverbially have their cake and eat it too remains an open question.
Ethical Investing?
In the end, the question is one of whether it is in fact possible to carry on with this sort of oxymoronic approach to investing. Then, one will be able to better position themselves should bad PR, legislative issues, or even a youth-led shareholder revolt upend long-held interest in China among aging fund managers.
Indeed, as younger people, who are overwhelmingly focused on "capitalism with a conscience," make up a larger and larger bloc of the investor base for fund managers, this issue is only going to grow in scope.
Morgan Stanley (MS) research indicates millennials are twice as likely as the overall investor population to invest in companies targeting social or environmental goals, while 90% of this cohort demand sustainable and socially responsible investing options within their 401(k) plans. These dynamics could very soon curb interest in investments in China as these principles flow from domestic firms to international investments.
Whether one is a billionaire or not, these are trends that are certainly worth caring about.
