By Sunny Oh
Some rank-and-file investors who thought they were putting money into socially responsible companies may in fact have been funding parts of an Orwellian surveillance regime — in China.
A number of ESG-oriented money managers — those who employ environmental, social and corporate-governance screens to identify investments — hold shares of China-based Hangzhou Hikvision Digital Technology Co. A favorite among Wall Street in the past few years, the security-camera maker has been accused by human-rights groups of providing some of the tools used to surveil members of the Uighur Muslim minority, up to a million of whom, according to researchers, are being held in mass internment camps.
On top of that, recent reports say the Trump administration was contemplating blacklisting Hikvision, and Congress has banned the U.S. government from using its cameras.
“It is unclear as to why index providers continue to include Hangzhou Hikvision within ESG-focused funds, given allegations with regard to its failure to respect consumers’ right to privacy and related human-rights concerns,” said Marija Kramer, managing director at proxy adviser Institutional Shareholder Services.
“Hikvision takes these concerns very seriously and has engaged with the U.S. government regarding all of this since last October,” said a Hikvision spokesperson.
Companies like Hikvision highlight the challenges adherents of ESG investing confront as they attempt to influence corporate behavior as they ferret out ethically palatable assets that offer attractive returns. The ESG-oriented investment world in the U.S. boasts roughly $12 trillion in assets as of 2018, having climbed from about $8 trillion two years ago, according to data from the Forum for Sustainable and Responsible Investment.
Launched primarily to help investors steer clear of tobacco and gun-related stocks, conscience-oriented investing has expanded to cover companies that are responsibly managed, promote human rights and achieve low carbon footprints, among other factors.
So why would Hikvision end up in ESG funds? The answer may come down to financial performance.
Since Hangzhou Hikvision /zigman2/quotes/202445716/delayed CN:002415 -0.27% started trading on the Shenzhen exchange in 2010, its stock has risen more than fivefold to 25.19 yuan /zigman2/quotes/210561991/realtime/sampled USDCNY -0.0014% (or $3.65) from around 4.50 yuan. This compares with gains in China’s broad-market CSI 300 index /zigman2/quotes/210598128/delayed XX:000300 +0.29% of some 20% over the same period.
Hikvision maintains lucrative government contracts throughout China. Its cameras dot street corners, lampposts and office buildings throughout Beijing, Shenzhen and other major Chinese cities.
A number of ESG investors such as Aberdeen Standard Investments and Comgest have amassed holdings in Hikvision, whose market capitalization has surpassed $33 billion, despite alleged human-rights issues. Around $388 million in Hikvision shares was held among 34 ESG-focused funds, identified through Morningstar Direct, which trawled recent regulatory filings to catalog investors ostensibly buying only shares of companies that adhere to social-responsibility criteria.
‘Big Brother’ tactics?
While Hikvision is the biggest surveillance-camera manufacturer in the world, investors may find it notable that its cameras are reportedly to be found positioned in streets, mosque s and the government-backed detention facilities in Xinjiang Province in which up to 1.5 million Uighurs are housed, according to Adrian Zenz, a researcher of the internment camps .
IPVM, a publication that focuses on the video-surveillance industry, reported that Hikvision had secured contracts worth more than $200 million since 2016 to provide security equipment to surveillance projects including these detention centers in Xinjiang, dubbed “re-education camps” by Beijing.
Uighurs make up around half of the population in Xinjiang , an autonomous region neighboring largely Muslim countries in Central Asia such as Kazakhstan, Kyrgyzstan and Tajikistan. In its push to deal with ethnic unrest, Beijing has reportedly cracked down on the religious freedom of the Uighurs , and has been accused of carrying out forced assimilation.
Hikvision’s links to the Chinese government extend in other directions, too. Regulatory filings show China’s supervisory body for state-owned enterprises holds a 42% stake in Hikvision via the China Electronics Technology Group (CETC), which, in turn, runs the Integrated Joint Operations Platform, a predictive-policing platform.
IJOP, the predictive-policing platform, serves as an interface that allows local police and public-safety officials to bring together a range of personal information, including license-plate numbers, camera footage, thumbprints and even blood samples to monitor the movements of Uighurs in China, according to Human Rights Watch.
“Anything part of the data-collection effort, you have to think about how the data is being used and for what purpose,” said Michael Posner, director of the Center for Business and Human Rights at New York University’s Stern School of Business.
“There should be some accountability,” said Darren Byler, an anthropologist at the University of Washington. “Hikvision has a moral obligation to track forms of injustice that disproportionately target minority peoples.”
The role of the ESG
Some say ESG investors, by dint of their investment philosophy, should be activists.
Do such investors have a duty to sell shares if a company fails to show sufficient headway in correcting any unethical practices identified?
Andrew Davenport, chief operating officer of RWR Advisory, a risk-management firm, says the answer is simple: yes.
Davenport told MarketWatch that it may be understandable that many funds hold shares of Hikvision, but for investors that are “in the ESG community, that are supposed to be ahead of the curve on human rights and other nonfinancial risk factors, it’s certainly less explainable — and less defensible.”