Putin's War is a model for Xi in Taiwan: ESG fund manager

(Bloomberg) — For Sonia Kowal, who runs one of the oldest socially responsible investment funds, the Russian invasion of Ukraine and the ensuing international condemnation through sanctions may be a general rehearsal for China.

The Chinese government is treating capitalism as a “rest stop on the road to socialism” and has been increasingly curbing its once “unfettered capitalism,” it said of the second largest economy in the world.

“What worries us is that risks will increase even more in the future,” said Kowal, president of Zevin Asset Management in Boston. “The Chinese Government is not indebted to anyone but to itself.”

The 44-year-old investor said she is concerned that Vladimir Putin's unprovoked attack on Ukraine may have President Xi Jinping thinking about what to do with Taiwan, which China considers part of its territory. And if you decide to act, the risk to the financial markets far exceeds the war in Ukraine, because global investments in China overshadow that of Russia.

China constitutes about 30% of emerging market benchmarks, while Russia accounted for less than 5% before invading Ukraine. Using another metric, funds that look at environmental, social and corporate governance factors have at least US$290 billion allocated to Chinese assets, which is about 15 times the amount they had in Russian assets before the war, according to data collected by Bloomberg.

Zevin, which managed $720 million at the end of February, has not decided whether to sell its stakes in the two Chinese companies owned by the firm, Kowal said. He didn't want to identify the companies.

Kowal, whose grandparents were refugees from Ukraine when it was part of the Soviet Union, said sustainable investors should not invest in Russia. Its 2008 invasion of Georgia and the annexation of Crimea six years later were obvious warning signs that investors should have avoided the country, he said.

As for China, the stakes are far more important because the country is a fundamental part of global supply chains, since they manufacture everything from smartphones to excavators. It will be “almost impossible” for investors to get rid of their exposure to supply chains, Kowal said.

“We have to figure out how to use a scalpel in China,” Kowal said. “And the unpredictability of government actions may be directed at different sectors. As an investor without a presence on the ground, how are we going to know what the next target will be?”

Kowal began his career in sustainability investments about 15 years ago and joined Zevin in 2009. The firm was founded in the late 1990s by Robert Zevin, a pioneer of socially responsible investment who left the firm four years ago.

Zevin's largest strategy, Global Appreciation, lost 8.6% net value in the first two months of this year. Last year, it achieved a 15% return and an annualized profit of 17.7% in the last three years. This is more or less in line with its benchmark, a combination of the MSCI ACWI index and Bloomberg's Intermediate US Government/Credit index.

Kowal said the strong interest in sustainable investing will diminish when investors realize that many funds trumping their ESG (environmental, social and corporate governance) credentials have little impact in the real world. Investors and faith-based foundations are likely to be the first to shift their money from ESG-labeled funds to socially responsible funds that better fit their missions and values, he said.

“Everyone is trying to convince their customers that they are having an impact, but in reality, we're not seeing much behavioral results despite the money wave,” Kowal said. “Impact washing is a big problem.”

Original Note:

ESG Veteran Sees Putin's War as Template for Xi to Grab Taiwan

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