Greetings from a beach, where I am starting a badly needed holiday (the rest of the Moral Money team will still be manning the fort over the next couple of weeks). The US Congress is about to head off on vacation too — but they managed to deliver a last-minute surprise last week, by making progress on a bill that would deliver $369bn worth of subsidies for green energy and other climate-friendly measures. The package is not quite law yet. But the crucial surprise was that senator Joe Manchin, the Democrat from West Virginia who has a swing vote, has now backed it in the name of energy security.
Will this now enable Washington to bring more countries to the table to back net zero measures ahead of the COP27 meeting later this year? Optimistic members of Biden’s administration tell me it will — and John Kerry, the climate envoy, is about to make a whirlwind round of visits to major emerging markets to foster support for faster decarbonisation. I hear that the Biden team is also trying to raise pressure (yet again) for more action from multilateral development banks to create blended finance projects for green transition in emerging markets; one idea floating around is that philanthropic groups will be called on to provide first-loss capital, if the multilateral development banks are slow to act.
Another point of progress, as we note below, is that efforts to create green accounting standards are gathering steam too. But will this be enough to offset the swelling, anti-green backlash? It is not clear. Meanwhile, read our story below for a timely analysis of the wider human rights problem bubbling in Xinjiang. I will be back in touch later in August! (Gillian Tett)
Moral Money Forum
Investment in developing countries is essential to tackling climate change and global inequality. Yet for ESG investors, social challenges, governance flaws and poor data can be obstacles to including emerging market companies in investment portfolios. Our next Moral Money Forum report will explore what it will take to increase ESG investments in emerging markets and create the funding flows needed to meet their social and environmental goals. And if you are an investor, we want to hear from you. In your ESG investment strategies, are you directing less capital to emerging markets companies — or avoiding them altogether? What are the obstacles to allocating more capital to companies in these markets? And what compelling research and data have you seen that might inform our reporting? Share your thoughts here.
Xinjiang sanctions aren’t stopping human rights abuses, report says
Perhaps no place on earth presents such a dilemma for ESG investors as the Chinese province of Xinjiang. It’s the scene of some of the world’s most serious and systematic human rights abuses — home to the mass imprisonment and “re-education” of Uyghur Muslims and other minorities. But it’s also, thanks in part to widespread forced labour, a massive supplier of materials for solar panels — giving it a central role in a sector crucial to fighting climate change.
As concern about the situation in Xinjiang has grown, the US and other governments have responded with economic sanctions against products linked to forced labour in the province. But are these measures doing any good?
Some of the best research on this issue has been done by a team of academics at the UK’s University of Nottingham. Their latest report, on the efficacy of the Xinjiang sanctions, is a grim read.
One central problem, the report said, was that the sanctions focused on blocking exports of abuse-tainted goods from Xinjiang, rather than on financial measures. The main effect of the current approach, the report said, was to push up costs for western customers, while the exporting companies had little trouble finding buyers for their products in China and other Asian markets.
“Arguably, western import bans will not work to reduce forced labour in the Xinjiang solar sector,” it added, “but only to reduce western consumers’ complicity in it.”
James Cockayne, the report’s author, told me that the western drive for “slavery-free” supply chains could have a perverse effect. As it sought to retain its international dominance, he said, the Chinese solar sector was shifting towards running two parallel supply chains.
One part of a group’s operation would be verifiably free of forced labour, selling at premium prices to western customers. Another production chain, using cheap involuntary labour in Xinjiang, would service China and other countries with less demanding standards.
“The result is that you have western consumers subsidising the use of forced labour to make goods that are sold to others elsewhere,” Cockayne said. “And that’s already beginning to happen.”
Western governments should do more to support the development of new solar supply chains that don’t rely on Chinese inputs, Cockayne said.
He also urged policymakers to broaden the scope of their sanctions. Financial sanctions had been underused in relation to Xinjiang, he said, despite the heavy reliance on equity and bond market financing of many companies linked to abuses — some of whose securities have found their way into ESG-branded funds run by some of the west’s biggest asset managers.
The existing sanctions regime, the Nottingham report pointed out, “does not prevent western investors from continuing to invest in and profit from the production and sale of goods made with Xinjiang forced labour”.
The report comes as some US conservatives are calling for the government to restrict Chinese access to the country’s capital market. “Many well-meaning Americans may inadvertently be propping up a genocidal regime because Wall Street does it for them,” Florida senator Marco Rubio wrote in May, urging measures such as a bar on Chinese companies listing in the US.
Keith Krach, under secretary for economic growth in Donald Trump’s administration, followed last week with a call for all Chinese-domiciled companies to be excluded from ESG funds.
Restricting capital flows into Xinjiang-linked companies could have much more impact than clamping down on exports, Cockayne argued. But he conceded that it was unclear whether even this would have any meaningful impact on the abuses happening in Xinjiang. For Xi Jinping’s government, he said, the logic behind the forced labour was not primarily commercial but a “strategic logic of social control in a province that’s seen as a potential source of domestic instability”.
To really shift that strategic calculus, I asked, might it be necessary to impose sanctions heavy enough to cause economic disruption at a national level in China — rather than just for companies operating in Xinjiang?
“You could consider that approach. And if you look at South Africa, for example, that’s ultimately where things ended up,” Cockayne replied, referring to the tough international measures against Pretoria’s apartheid regime in the 1980s. But similarly crushing action by major economies against China was hard to imagine, he added, given its importance to the global economy. “China is not South Africa.” (Simon Mundy)
ISSB brings world together for sustainability standards
Amid this summer’s record-breaking heat, writing climate disclosure standards for companies might seem like rearranging deck chairs on the Titanic. But the International Sustainability Standards Board (ISSB), established at last year’s Glasgow climate gathering, has brought together the world’s biggest companies, investors and regulators to push forward with harmonised climate disclosure standards on a par with the global accounting rules.
After the comment period for ISSB’s draft standards closed on Friday, the Saudi Central Bank, Temasek and Burberry were just some of the 428 groups who wrote in. The global breadth of these commenters underscores the ISSB’s growing importance.
And encouragingly, there is broad agreement that ISSB is moving in the right direction. But there was some concern that emerging markets appeared to have been left out.
China’s stock market regulator said that the draft “fail[ed] to adequately incorporate differences between developed and emerging markets, large companies and small to midsize companies”. The Chinese Securities Regulatory Commission suggested different starting dates and criteria for developed and emerging markets as well as small versus big companies.
There is also a tussle over scope 3 carbon emissions — the broadest measurement of carbon emitted by an entity.
Vanguard, for example, said investors would benefit from “more targeted and flexible disclosures” than the full scope 3 requirement that ISSB proposed. But the UK’s Financial Conduct Authority said the quality of disclosures for scope 3 emissions was getting better. Separately on Friday, the FCA said it was “encouraged” to see that about two-thirds of premium-listed UK companies disclosed their scope 3 emissions in 2021.
ISSB wants to have a final version of its standards published by the end of the year, and chair Emmanuel Faber has some tough decisions to make in the months ahead.
But the heat crisis combined with geopolitical uncertainty demands action now. “We have a once-in-a-generation opportunity to adopt a globally consistent baseline of sustainability disclosures,” the FCA said in its comment letter. “The ISSB’s proposals represent a critical milestone on the path to this new paradigm for corporate reporting.” (Patrick Temple-West)
Are car manufacturers blind to human rights abuses? Inclusive Development International has partnered with Human Rights Watch to investigate the human rights violations lurking under the hood of aluminium production in the automobile industry. Check out their report here to find out more about the harmful effects of mining on Guinea’s local communities, and the steps car companies can take to mitigate human rights violations in the transition towards a more socially responsible future.
Moral Money Summit Asia
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