This Insight reveals some of the environmental, social and governance challenges for responsible investors. It aims to highlight the issues that investors should be aware of, and demonstrate how we navigate these as responsible investors and the different options we have in our toolbox to address these.
Ethics and Values: our exclusion criteria
EdenTree has long used an oppressive regimes screen and applies a ban on direct investment in State Owned Enterprises. This screen was reviewed and improved in 2018, to reflect better the growing complexity of the issue. Based on weighted country ratings provided by Freedom House, Transparency International and the World Economic Forum Gender Gap (political empowerment score), we have created a list of high risk countries. Companies involved in problematic activities in those countries are excluded from investment. It is no surprise then that China is on this list. It is through this screen in particular that we avoid investing in Chinese SOEs, as well as companies that are at high risk of being complicit in human rights violations in China. More information on this screen is available in our RI Expert Brief on Oppressive Regimes.
ESG & Responsibility: seeking responsible businesses
Whilst not everything is captured in our oppressive regimes exclusion, the second step of our screening process, where we look at ESG risks, can also act as a brake. Many of the issues we have highlighted in this insight including poor health and safety, exposure to coal, corruption risks, lack of labour rights and others are captured here and where we believe companies are not meeting our standards we will not invest. In the past this has led to the exclusion of textile manufacturer Texwinca and online retailer Alibaba.
Engagement: constructive dialogue to discuss red lines
This Insight shows how complex many of the issues are and companies can easily find themselves in turmoil because of their operations or supply chains in China. Whilst not all issues are a reason to divest, we do engage with companies on how they navigate the dilemmas highlighted in this Insight. We have for example had in depth conversations with HSBC and Standard Chartered to express our concerns in relation to their support of the National Security Law in Hong Kong. In some cases companies can address these issues and apply the same high standards as in other countries, however we recognise that some issues will be intensely political and therefore tricky to navigate. Microsoft is another example, we engaged with the company to understand how it deals with data privacy in the PRC and we raised concerns about government data requests and censorship. We were reassured that Microsoft stores customer data outside China on purpose; data is only stored in countries where the rule of law applies, to ensure that end user data requests are not possible in China. This is a good example of a company recognising the challenges, but finding the right solutions to respect its own values and policies.