Climate Assets monthly update: The ESG contradiction – operating and working in oppressive regimens
Date: 14 February 2023
Someone I often find myself sitting next to at dinner parties has been offered the opportunity of a lifetime - heading up ESG strategy for a sovereign wealth fund in the Middle East. Among all the considerations a job offer like that will trigger, his family was first, as it should be. He has a young family and thinks his kids will get used to it very quickly. His wife says she welcomes the idea of a career break. So far so good. When explaining that he has decided to accept the offer, he also talked about his property, his parents, his cycling mates and even the weather. By the time that dessert was served, he seems to have considered everything, but not once did he question the human rights record of his new employer.
As part of the job description, all fund managers seek to increase their clients’ wealth or financial firepower.
Thus, when working for the sovereign wealth fund of an oppressive regime, one can argue that the fund manager would help to finance actions and projects that may have serious human rights implications. Whilst working for an authoritarian state feels like a contradiction for an ESG investment practitioner, I recognise that this is a complex area, with similar undertones to the debate of divestment from, or engagement with, fossil fuel companies.
So-called authoritarian states control around US$10tn of assets through a mixture of pension funds, central bank reserves and sovereign wealth funds. Take China for example, its sovereign wealth funds are more than double of those from Norway, according to the Global Sovereign Wealth Fund, a leading data hub for state-owned investors.
The Climate Assets Funds do not invest directly in China, although we have exposure through the value chain of many of the manufacturing companies we invest in, particularly within the semiconductor industry. As microchips or semiconductors are used in almost all technology we use today – from toasters to smartphones - they have become a key component of the world economy. In 2022, global sales of microchips reached over US$570bn. As one indication of their importance, China spends more money on importing chips than it does on oil. The global pandemic was a wakeup call to understand the importance of the semiconductor supply chain. The shortage of chips caused car factories to close and the price of electronics to spike. There is also a national security component as chips are critical to artificial intelligence and data gathering.
Around 90% of the most advanced microchips are made in Taiwan. However, these chips often end up being used in products manufactured in China. Microchips are the brains of modern electronics, with Intel (United States), Samsung (South Korea) and TSMC (Taiwan) the main manufacturers of the leading-edge chips used for computers, smartphones, and servers.
ASML (Netherlands) is the only company that has the knowhow to make the machines that print the most advanced chips. ASML’s tools use the most powerful commercial lasers to heat tin to the temperature of the surface of the sun, releasing extreme ultraviolet (EUV) light, which is reflected using mirrors onto the surface of a semiconductor wafer for etching extremely fine circuits. This is a highly R&D-intensive industry and currently there are no viable competitors to ASML for EUV technology.
We own a stake in TSMC in the Climate Assets Balanced Fund, as part of our resource efficiency theme. TSMC leads in using the most advanced technology and producing the most efficient chips. Its chips are used in a range of electrical products playing an important role in global electrification. For further information on this investment theme please read our resource efficiency factsheet.
Whilst the Inflation Reduction Act has attracted a lot of attention, last year the US also passed the Chips and Science Act, with US$52.7bn in new funding to boost domestic research and the manufacturing of semiconductors in the US to reduce reliance on Asia. China has launched a complaint at the World Trade Organisation (WTO) and the US responded by invoking rules on restrictive trade to protect national security. Resolution from the WTO could take years, however long-term it is likely that there will be separate microchip supply chains for China and the west. The splintering of the semiconductor industry will have a major impact on the global economy and balance of power for many years to come.
This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination of marketing communications. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned. Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.
Don’t miss the Climate Assets Funds monthly update – delivered straight to your inbox.
Climate Assets Funds
The Climate Asset Funds invests in companies that make a positive contribution to the world, with a strong underpinning of ethical values.