LGIM right to remove ESG label from China bond ETF

Downgraded to Article 6 under SFDR

Tom Eckett

Tom Eckett

The ‘social’ component is the often-overlooked aspect of ESG that must be taken more seriously by asset managers when offering exposure to China, especially considering the government’s human rights abuses in the Uyghur region.

Last week, Legal & General Investment Management (LGIM) removed ESG from the name of its China quasi-government bond ETF anddowngraded itfrom Article 8 to Article 6 under the Sustainable Finance Disclosure Regulation (SFDR).

Launched in December 2020 – initially as the L&G ESG China CNY Bond UCITS ETF (DRGN) – the ETF had amassed $435m assets under management (AUM) in its first six months of trading before coming under public fire from an investor.

In July 2021, Alan Miller, co-founder and CIO at SCM Direct, said LGIM was “brazenly greenwashing and misleading investors” and called on the Financial Conduct Authority (FCA) to fine the UK giantfor mis-selling.

Following the decision to remove ESG from DRGN entirely, LGIM said in a statement the move reflected “current expectations of our clients, regulators and the general market” while Miller stressed it showed “a complete breakdown in their compliance function that it ever launched this product as ESG”.

What is particularly controversial about labelling a China government bond ETF as ESG is the Chinese Communist Party’s treatment of Uyghur minorities in Xinjiang and the implications this has on China’s ‘S’ score.

The Chinese government has reportedly detained over one million Muslims in camps over the past five years and subjected them to crimes such as forced labour and involuntary sterilisations.

In response, the US has labelled Beijing’s actions as genocide while the United Nations stated they could constitute crimes against humanity. The Chinese government has repeatedly denied these allegations.

However, it is not just LGIM that has been scrutinised for owning securities in ETFs that have engaged in the state-sponsored labour transfers of Uyghurs or to the surveillance of people in the region.

A recent report from Hong Kong Watch and Sheffield Hallam University, titled Passively funding crimes against humanity, warned many ETFs from the major asset managers had exposure to companies linked to human rights abuses in China.

In particular, research from Responsible Investorfound as many as 26 Article 9 funds – the ‘dark green’ category under SFDR – have exposure to at least one of the companies identified in the report.

The report called on regulators to “hold firms responsible for their ESG” claims and for asset managers to give proper weight to human rights violations through greater focus on the ‘S’ component of ESG.

“This report has shown that major institutional investors are funding companies known to be involved and benefiting from the crisis in the Uyghur region,” the authors said. “From state pension funds in the US to regional funds in the UK to the national pension plan in Canada, investors around the world are exposed.

“This is unacceptable. We must act.”

This greater focus on the ‘S’ component of ESG will go a long way in solving the issue of failing to account for human rights abuses and with ESG now mainstream, it is crucial ETF issuers ensure they are even more careful when launching sustainable strategies.

Any greenwashing allegations will damage an asset manager’s ESG credentials and the industry as a whole.

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