Expecting publicly traded companies to do more than simply return shareholder value — their fiduciary responsibility — is a fairly new development in Western capitalism. The idea that corporate leadership and shareholders should explicitly care about environmental, social, and corporate governance (known as ESG) issues beyond how they might affect the bottom line has been around for only about 30 years.
But now, ESG investing has become a big driver in steering capital to corporations deemed to be good stewards of subjective principles. By 2025, financial management firms that claim to invest with ESG principles are projected to account for $50 trillion of a total global value of $140.5 trillion — more than a third of managed investments.
But is ESG investing trustworthy? Does it really do what it claims to do?
MSCI is one of the world’s largest investment support services firms, with $2.1 billion in revenue. It offers an ESG rating service. I noticed that my Charles Schwab account recently started to display MSCI’s ESG ratings alongside that of the more traditional ratings services — services focused on a company’s profitability.
Comparing U.S. and Chinese Companies’ Ratings
Curious, I looked into the rating of a firm I own some stock in: Texas-based Brigham Minerals (NYSE: MNRL). Brigham looks for land that could produce oil and gas, and owns mineral and royalty interests in 7,909 oil wells and 688 natural gas wells in West Texas, New Mexico, Oklahoma, Colorado, Wyoming, and North Dakota. MSCI rates Brigham Minerals as a B, the sixth lowest of seven ratings that range from AAA to CCC, labeling it a “laggard” in the industry with an overall score of 2 out of 10.
I previously wrote about ESG investing’s blind spot for China three years ago in Fox Business, pointing out that investment firms playing in the ESG space were also bullish on China — a nation with terrible air and water pollution (the “E”), horrendous human rights abuses (the “S”), rampant corruption, opaque accounting standards, and rule of law only at the forbearance of the Chinese Communist Party (the “G”).
Not expecting the financial industry to have changed for the better, I looked up three China-based energy companies and compared them to Brigham Minerals. They were Xinyi Solar Holdings (OTC: XISHY), China Resources Gas Group (OTC: CGASY), and China Coal Energy Company (OTC: CCOZF). All three beat the American energy company in their overall rating.
Buying Into CCP-controlled Enterprises
Now, it’s important for investors to understand that you really can’t own shares in a Chinese corporation. When you buy shares in a corporation based in China, you’re really buying American Depositary Receipts (ADRs) that represent shares issued by companies in the People’s Republic of China. As such, your ownership rights are more theoretical than real and are subject to the whims of the Chinese Communist Party.
Further, many Chinese firms that have ADRs traded in the United States are themselves subsidiaries of state-owned enterprises — meaning that if you buy these ADRs, you are directly investing in an entity fully controlled by the Chinese Communist Party.
As an example, China Coal Energy is 58.36 percent owned by China National Coal Group, a state-owned enterprise. China Coal Energy owns 12 coal mines, 13 coal-processing plants, five coking plants, four coal mining equipment manufacturing plants, and two mine design institutes. They’re really into coal.
That makes sense, as coal is China’s largest source of energy — with the PRC having on the order of five times the size of the U.S. coal powerplant fleet in operation or in construction. MSCI rates China Coal Energy as “BB” — one step better than Brigham Minerals, with an environmental rating of 4.7 of 10 compared to Brigham’s 0.8, a social rating of 4.2 compared to Brigham’s 3.5, and a governance rating of 2.2 compared to 6.4 for the American firm. Overall, China Coal rates 3.1 out of 10 compared to 2 for Brigham.
China Resources Gas Group mostly invests in natural gas pipelines. It’s a subsidiary of China Resources Holdings Company, a state-owned company. The company got its start in Hong Kong as Liow and Company in 1938. Its purpose was to raise funds and purchase supplies for the People’s Liberation Army, then fighting the Nationalists in the Chinese Civil War — and, occasionally, the Japanese as they pressed their attacks into China.
By the 1960s, due to grain shortages caused by Maoist policies, the firm was used to import vast amounts of “capitalist grain” to stave off mass starvation. MSCI generously rates China Resources Gas as an “A” — the third-best of seven grades, with better grades than Brigham in both the environment, 7.7 to 0.8, and social, 7.6 to 3.5. Only in governance does China Resources Gas fall short, earning an “average” rating of 4.6 to Brigham’s 6.4. China Resources Gas nets an overall rating of 6.3 to Brigham’s 2.
Xinyi Solar Holdings should be problematic for MSCI — after all, China’s solar power industry, a global juggernaut, is a heavy user of materials produced by slave labor in Xinjiang, a Muslim-majority region formerly known as Turkestan where the Chinese communist government has been engaged in a grinding genocide. MSCI even has a corporate statement against “modern slavery” on its website, claiming that the firm “is committed to protecting human rights globally… Specifically, the Firm strongly opposes slavery and human trafficking and will not knowingly support or conduct business with any organization involved in such activities.”
This is at odds with MSCI’s ESG rating of Xinyi Solar — an “A” — with scores of 8.1 for environment (heavy metal pollution aside, apparently), 5.6 for social, and 2.6 for governance. Overall, Xinyi scores a 6.1 of 10 compared to 2 for the Texas firm.
That a firm in China that relies on slave labor for key portions of its supply chain has a better social score than an American firm that pays landowners who freely sell them their mineral rights betrays an upside-down ethic where freedom is slavery and ignorance is strength. Of course, that hasn’t stopped 174 institutional owners from investing in Xinyi Solar, among the largest being JP Morgan, Invesco, and Vanguard.
Counter to ESG Goals
This leads to one last, odd ESG story. Texas lawmakers, concerned about how banks and financial institutions aggressively implementing ESG investing rules were beginning to starve Texas’s energy industry of capital, passed a law in 2021 to address the problem. Senate Bill 13 prohibited Texas’s pension and investment funds (worth about $300 billion) from investing in “financial companies that boycott certain energy companies.”
But figuring out what companies those might be turned out to be a somewhat complicated process. So, the Texas state comptroller, charged with implementing the new law, turned to… MSCI. The problem was that MSCI is guilty of pushing ESG to the detriment of domestic energy produced in Texas, forcing Texas to modify its contract with MSCI to avoid violating the new law.
Ben M. “Bud” Brigham, founder and executive chairman of Brigham Minerals and other energy companies, has been an ESG skeptic for years. He tells me that “companies innovating in free markets strive to create value for their owners which benefit all the legitimate stakeholders. This is empirically validated in America, where we enjoy unprecedented levels of clean air and clean water compared to other major economies. In contrast, ESG investing — a relatively subjective exercise — often represents the influence of illegitimate stakeholders, and therefore ends up being irresponsible, destructive, and counter to its stated goals.”
So, here’s the bottom line from the self-righteous global elites: Chinese-government-owned coal, fine; Chinese slave-provisioned solar power, good; Chinese state-owned natural gas, better; American domestic natural gas and oil, terrible.
Source: The Federalist
