Fake ‘ESG’ group ranks Chinese slave-powered energy companies higher than US oil and gas firms
From June 28, 2022, to Feb. 8, 2024, the Shanghai Stock Exchange Index and Hong Kong’s Hang Sang Index, two of China’s most well-known stock indices, have experienced significant losses. The Shanghai Stock Exchange Index has lost 20 percent of its value, while Hong Kong’s Hang Sang Index has lost 28 percent. These losses come despite the Chinese Communist Party’s efforts to stabilize the market by purchasing $278 billion in stocks.
Experts widely agree that China is facing severe economic challenges. Under the leadership of Xi Jinping, China has seen a centralization of power and a restriction of capitalist freedoms. The lack of transparency in China’s economic stagnation is further exacerbated by the recent ban on the release of corporate and economic information.
However, there is one group of financial analysts that continues to confidently rate publicly traded Chinese stocks: the environmental, social, and governance (ESG) ratings firms. This is a source of shame and embarrassment for these firms.
In June 2022, I highlighted the misleading nature of ESG ratings by comparing a Texas-based oil and gas royalties company, Brigham Minerals (now known as Sitio), with three Chinese energy stocks. Despite the use of slave labor in its supply chain, Xinyi Solar Holdings received a higher ESG rating than Brigham Minerals.
The Chinese stocks, including Xinyi Solar Holdings, China Resources Gas Group, and China Coal Energy Company, are not equivalent to stocks in the U.S. sense as they do not provide legal ownership of the Chinese companies. Instead, they serve as vehicles for China to attract foreign capital.
How Are These Chinese Firms Rated Now?
Despite the lack of independent audits and the classification of financial health information as national security, MSCI, an investment support services firm, continues to rate Chinese firms. In 2022, MSCI rated the three Chinese energy stocks higher than the U.S. energy stock, Brigham Minerals. This raises questions about the credibility of ESG ratings.
Xinyi Solar Holdings, China Resources Gas Group, and China Coal Energy Company all received higher ESG ratings than Brigham Minerals. Despite the decline in stock prices, MSCI continues to rate these Chinese firms, raising doubts about the accuracy of their ratings.
ESG investing has gained popularity in steering capital towards companies that align with subjective principles. However, the reliability of ESG ratings is questionable. By 2025, financial management firms claiming to invest with ESG principles are projected to account for a significant portion of managed investments.
While the American Depositary Receipts in Xinyi Solar Holdings and China Resources Gas Group have experienced declines, MSCI’s ratings for these firms have increased. This discrepancy further undermines the credibility of ESG ratings.
It is concerning that MSCI continues to rate these Chinese firms highly, especially considering the geopolitical tensions and human rights concerns surrounding China. The ESG scores provided by MSCI hold little validity and should not be relied upon.
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What factors contributed to the significant losses experienced by the Shanghai Stock Exchange Index and Hong Kong’s Hang Seng Index from June 2022 to February 2024, despite the efforts of the Chinese Communist Party to stabilize the market?
Ack of transparency and economic challenges in China, the environmental, social, and governance (ESG) ratings firms continue to give high ratings to publicly traded Chinese stocks. This raises concerns about the credibility and accuracy of these ratings.
The Shanghai Stock Exchange Index and Hong Kong’s Hang Sang Index have both experienced significant losses from June 2022 to February 2024. The Shanghai Stock Exchange Index has lost 20% of its value, and Hong Kong’s Hang Sang Index has lost 28%. These losses are surprising considering the efforts of the Chinese Communist Party to stabilize the market by purchasing $278 billion in stocks.
Experts attribute these losses to China’s centralization of power and restriction of capitalist freedoms under the leadership of Xi Jinping. The lack of transparency in China’s economic stagnation is further exacerbated by the ban on the release of corporate and economic information. These factors contribute to the overall uncertainty and skepticism surrounding China’s economy.
Despite these challenges, ESG ratings firms continue to rate Chinese stocks favorably. This raises questions about the reliability and credibility of their assessments. In June 2022, a comparison was made between a Texas-based oil and gas royalties company, Brigham Minerals (now known as Sitio), and three Chinese energy stocks. Despite the use of slave labor in its supply chain, Xinyi Solar Holdings received a higher ESG rating than Brigham Minerals. This stark discrepancy highlights the misleading nature of ESG ratings and their failure to accurately assess the ethical and sustainable practices of companies.
It is crucial to recognize that Chinese stocks are not equivalent to stocks in the U.S. sense. They do not provide legal ownership of the Chinese companies but instead serve as vehicles for China to attract foreign capital. This distinction further complicates the assessment and rating of Chinese stocks, as ownership rights and governance structures differ significantly.
The continued confidence in Chinese stocks by ESG ratings firms is a cause for concern. It raises doubts about the methodology and criteria used in their assessments. As investors increasingly rely on ESG ratings to guide their investment decisions, it is essential for these firms to ensure the accuracy and transparency of their ratings. Failure to do so undermines investor confidence and potentially exposes them to unnecessary risks.
In conclusion, the recent losses in the Shanghai and Hong Kong stock markets, coupled with the lack of transparency and economic challenges in China, raise questions about the credibility of ESG ratings for Chinese stocks. The discrepancy between the ratings and the ethical practices of certain companies highlights the need for greater scrutiny and transparency in these assessments. As investors, it is crucial to remain vigilant and conduct thorough research before making investment decisions based on ESG ratings.
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