The world’s largest asset manager BlackRock and largest index provider MSCI are being investigated by a US congressional committee for facilitating investment in Chinese companies blacklisted by the US government.
A letter dated Monday this week by the House of Representatives’ Select Committee on the Chinese Communist Party (CCP) said the two firms facilitate US investments into companies the government earmarked as supporting Chinese military advances and human rights abuses, the Wall Street Journal reported.
The initial review found investment vehicles had directed at least $429m into 20 blacklisted companies acting “directly against the interests of the US”, but “the true scale is likely much larger”, the committee said.
The select committee formed after the Republican Party took control of the House in January.
It is intended to make policy recommendations rather than having the power to write legislation, however, it can subpoena company executives and public officials.
In April, Republican Representative and committee chair Mike Gallagher said he would issue subpoenas to those who do not cooperate with its investigations.
In a statement, BlackRock said: “Like many global asset managers, BlackRock offers our clients a number of strategies to invest in or exclude China from their portfolios.
“The majority of our clients' investments in China are through index funds, and we are one of 16 asset managers currently offering US index funds investing in Chinese companies.
“With all investments in China and markets around the world, BlackRock complies with all applicable US government laws. We will continue engaging with the Select Committee directly on the issues raised.”
MSCI responded to the committee’s investigations on Tuesday by stating it was “reviewing the inquiry”.
The news comes ahead President Joe Biden looking to publish an executive order to intensify scrutiny on US companies investing in sectors of strategic importance in China including artificial intelligence, semiconductors and quantum computing.
The order is set to require companies to notify government that investments in relevant sectors are being made.
Alex Matturri, former CEO of S&P Dow Jones Indices, argued the congressional investigation is a politicisation of the indexing business and misconstrues the role of index providers and asset managers.
“Asset managers such as BlackRock offer many different investment products and it is up to investors or their advisors to make a decision if they want particular country exposure in their portfolio,” Matturri said.
He added it is easy to offer investment products that exclude individual countries, if desired, but index providers are not aware of the investment objectives of end investors.
“That role is provided by the financial adviser or plan sponsor. So long as a market is accessible to global investors, it should be reflected in global indices,” he concluded.
However, this is not the first time asset managers and index providers have been in the spotlight for providing exposure to contentious Chinese companies.
Last year, ETF Stream expanded on an investigation by non-profit Hong Kong Watch and Sheffield Hallam University, finding 42 ETFs – nine of which were ESG or SRI labelled – investing in 13 companies flagged as either building Uyghur internment camps in Xinjiang province, using forced labour, or sourcing goods from suppliers using such labour.
The investigation flagged at least 25 indices from five providers, tracked by ETFs from 12 asset managers operating in Europe alone.
It raises the question of whether BlackRock and MSCI were singled out by the recent investigation simply for being the largest in their respective peer groups.