The Swiss Connection: How UBS & Credit Suisse's investments in China are undermining ESG & human rights

ESG & Human Rights

The Swiss banks, UBS and Credit Suisse, continue to lead the way in terms of championing Environmental, Social, and Governance (ESG) products and encouraging Western investors to pump their money into China.

Credit Suisse boasts that it intends to become ‘a leader in sustainability in the financial industry’ and since September 2019 has integrated ESG factors into all of the asset classes it offers investors.[1] Similarly, UBS writes that it has provided ESG research to its clients since 2004, encourages ESG disclosures, and vetting its transactions and assessing business along its ESG criteria.[2]

Yet, an analysis of the behaviour and investments of these banks reveals that like so many occupying this space, Credit Suisse and UBS, appear happy to pay lip service to ESG while at the same time investing substantial amounts of their client’s money into Chinese companies exposed to gross human rights violations.

In a recent report, Hong Kong Watch found that Western pensions funds were investing heavily in companies like Hikvision, Dahua Technology, and iFlytek on the US sanctions list for the links to Xinjiang, Chinese state banks, and in Alibaba and Tencent, who have both been accused of complicity in gross human rights violations.  A study of UBS and Credit Suisse’s China and Emerging Markets funds show that both of these banks are part of this worrying trend.[3]

Like Blackrock and other western financial services industries, Credit Suisse and UBS continue to bet on China’s continued growth. Both banks are increasing the recruitment of staff in China to handle growing investments[4] and in Hong Kong continue to actively facilitate the crackdown on human rights by following new national security guidance which requires them to spy on their clients[5].

Alibaba and Tencent

As two of the largest Chinese technology companies, Alibaba and Tencent cannot divorce themselves from the Chinese state, which is increasingly using a mixture of surveillance and technology to oppress, monitor, and incarcerate minorities within its borders.

Alongside Hikvision, Alibaba has previously provided the Chinese state with facial recognition software which explicitly targets Uyghurs. While Tencent as the owner of WeChat, has built a backdoor into its software which has allowed the Chinese Government to censor WeChat and collect private messages as evidence to justify incarcerating Uyghurs and Tibetans.[6]

Credit Suisse not only received substantial advisory fees when it brought Alibaba to market, but alongside UBS in the past has offered extended credit to Alibaba executives Jack Ma and Joe Tsai as part of share pledges, which includes facilitating Jack Ma’s purchase of a mansion in Hong Kong’s elite Peak district and owning Joe Tsai’s private jet.[7]

These close links with Alibaba are reflected by the fact that alongside Tencent, Alibaba is listed as one of the largest companies weighted in UBS and Credit Suisse’s China and Emerging Market funds. For example, UBS has USD$808m in Alibaba (7.29% of the total fund) and USD$949m in Tencent (9.88% of the total fund) in its China Opportunity Fund[8], a further USD$107m in Alibaba (7.4% of the total fund) and USD$ 142m in Tencent (9.8% of the total fund) as part of its Greater China Equity Fund[9], and USD$236m in Alibaba (7.29% of the total fund) and USD$320m in Tencent (9.88% of the total fund) as part of its All China Fund[10].

In these three funds alone, UBS has USD$1.1bn invested in Alibaba and USD$1.4bn invested in Tencent. Both technology companies also are listed prominently in UBS’s Life Global Emerging Markets Equity Fund, with Alibaba making up 3.5% (£17.1m) of the fund and Tencent 5% (£23.8m)[11].

Alongside UBS, Credit Suisse places Alibaba and Tencent prominently in its emerging market equity funds, with Alibaba making up 3.5% (USD$26.8m) and Tencent making up 4.3% (USD$32.9m) of Credit Suisse’s Equity Emerging Markets Blue Fund in November 2021,[12] and both remaining significant holdings in its Credit Suisse’s UCITS ETF SIVAC (as of June 2020)[13].

Given these investments, one may find the recent call by UBS for Western pension funds to increase their investments in Alibaba and Tencent driven by self-interest, rather than an honest assessment of the current regulatory risks presented by Xi Jinping’s ongoing crackdown.[14]

Chinese companies on the US sanctions list

Similarly, both banks seem oblivious to the fact that some of the companies in their funds are on US sanctions lists and under investment bans for their involvement in constructing China’s surveillance state, links to the People’s Liberation Army, and the construction of camps where over a million Uyghurs are currently incarcerated.

As of June 2020 (the last publicly available document of its investments), Credit Suisse had investments in seventeen companies on the US sanctions list through its UCITS ETF SIVAC, including Hikvision, Dahua Technology, and iFlytek, all three of which are accused of direct involvement in human rights violations in Xinjiang[15].

In the case of UBS, it is no stranger to scrutiny over its investments in China. In 2020, the bank was investigated by the OECD’s human rights grievance system regarding its links and investments in Hikvision[16]. In response, UBS committed in December 2020 to removing Chinese companies sanctioned by the USA from its global investable market indices.[17]

Despite these assurances, Hong Kong Watch has found that as of 11 November 2021 UBS has USD$22 million invested in Dahua Technology and USD$57 million invested in iFlytek as part of its UBS ETF (LU) MSCI China ESG Universal UCITS[18]. While Alibaba (4.36%) and Tencent (4.32%) accounted for 2nd and 3rd largest holdings in the fund[19].  UBS markets this fund as tracking the performance of Chinese companies against ESG considerations.[20]

Conclusion

Of course, UBS and Credit Suisse are not alone when it comes to investing heavily in Alibaba and Tencent and appearing to continue to invest in Chinese companies on the US sanctions list. They are part of a global network of financial services companies in Canada, UK, USA, Europe, Australia, and New Zealand whose funds are over-leveraged in China, invested in companies with questionable human rights records, and largely unmoved by the growing reputational and financial risks.

The only way to fix the growing gulf between their hollow claims of ethical investment and the financial support they are offering to companies exposed to gross human rights violations, is for lawmakers to get serious about regulating the ESG space.

Sam Goodman, Hong Kong Watch’s Senior Policy Advisor

Reference

[1] https://am.credit-suisse.com/international/en/asset-management/esg.html

[2] https://www.ubs.com/global/en/investment-bank/what-we-offer/esg.html

[3] https://www.hongkongwatch.org/all-posts/2021/9/22/new-report-esg-china-and-human-rights-why-the-time-has-come-for-investors-to-act

[4] https://www.straitstimes.com/business/banking/credit-suisse-ubs-move-bankers-to-mainland-china-from-hong-kong

[5] https://www.thetimes.co.uk/article/hsbc-spying-on-clients-for-hong-kong-protest-links-kln7sgqb8

[6] https://www.hongkongwatch.org/all-posts/2021/9/22/new-report-esg-china-and-human-rights-why-the-time-has-come-for-investors-to-act

[7] https://www.ft.com/content/1efa8623-4e4c-435b-8195-26b3fb9839b9

[8] China Opportunity Fund with a total of USD$9.6bn under management:  https://www.ubs.com/2/e/files/20487309fesg.pdf

[9] Greater China Fund with a total of USD$1.4bn under management: https://www.ubs.com/2/e/files/0547581fesg.pdf

[10] All China Fund with a total of USD$3.2bn under management: https://www.ubs.com/2/e/files/41207668fesg.pdf

[11] UBS Life Global Emerging Markets Equity Fund with a total of £476.3m under management: https://www.ubs.com/2/e/files/RET/FS_RET_GB00BKQVG640_GB_EN.pdf

[12] http://factsheets.financialexpress.net/ZIL/JUKE_ROW.PDF & https://finpension.ch/app/uploads/factsheets/CH0017844686_fact-sheet_en.pdf

[13]USD$3.9m in Alibaba & USD$4.9m in Tencent out of USD$42.7m fund https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx/?type=packet_fund_doc_reports_and_accounts&id=744c305a-2000-49bc-99b5-4d373c7104be&user=okU8xy7sRzYjTM4E5vsoaCePRmP6myVVQJWjJFY5KuxOOwxq%2f39oC0pINRnaLy4P&r=1

[14] https://headtopics.com/us/ubs-says-these-chinese-internet-stocks-are-a-buy-as-regulatory-fears-may-ease-22301423

[15]This includes over USD$200k in Hikvision, over USD$98k in iFlytek, & over USD$45k in Dahua Technology: https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx/?type=packet_fund_doc_reports_and_accounts&id=744c305a-2000-49bc-99b5-4d373c7104be&user=okU8xy7sRzYjTM4E5vsoaCePRmP6myVVQJWjJFY5KuxOOwxq%2f39oC0pINRnaLy4P&r=1

[16] https://www.responsible-investor.com/articles/ubs-subject-of-human-rights-complaint-over-investments-in-uighur-camp-contractor

[17] https://www.ft.com/content/6e166620-82b0-4c27-8541-2bf8279a1f62

[18] Out of a total fund of USD$212 million https://www.ubs.com/nl/en/asset-management/etf-private/etf-products/etf-product-detail.nl.en.lu1953188833.fundholdings.html

[19] https://www.ubs.com/2/e/files/RET/FS_RET_LU1953188833_NL_EN.pdf

[20] https://www.ubs.com/nl/en/asset-management/etf-private/etf-products/etf-product-detail.nl.en.lu1953188833.esgdisclosures.html