The exposure of environmental, social, and governance (ESG) investors to Russia has already proved something of an (expensive) embarrassment. In hindsight, ESG investors should have held Russia to the same standard as its companies, but it’s not too late to apply that lesson to other countries.
While Russia had a modest allocation in emerging-market ESG funds, China does not. Chinese companies at the end of last year had a weighted average allocation of 28 percent in U.S.-based emerging-market ESG stock mutual funds and exchange-traded funds, according to Morningstar. And China is no less concerning than Russia.
For all practical purposes, if any investment involves a stake in a company that is a major source of pollution, utilizes forced labor in its supply chain or enables human rights abuses in any way, and does not follow generally accepted accounting principles or cannot have its financial records transparently audited, it must not be considered an ESG investment….