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USA: Why Washington and Wall Street struggle to apply ESG considerations in China

"China can’t get what it really wants", 25 March 2021


ESG rests on transparency and universally accepted standards. [...] Given the unwillingness of the PRC to provide access to that kind of information (they treat audits of publicly listed companies as “state secrets”) and the expulsion of independent journalists who could bring these risks to light, it is difficult to see how the PRC will silence the growing chorus of voices demanding greater transparency and accountability. [...]

The Biden administration, Wall Street and the American people have two options: apply ESG considerations narrowly to just those jurisdictions that have high degree of transparency or apply them globally and hold everyone to the same standards.

The first option leads to regulatory arbitrage that shifts capital to jurisdictions like the PRC where the “costs” of complying with high standards aren’t imposed and away from jurisdictions like the United States and its allies that enforce high standards through transparency, a free press and an independent judiciary.

The second option creates leverage over the PRC to be transparent and comply with ESG considerations while pushing capital to places where investors have a much higher degree of certainty. The PRC will use threats and inducements to get American investors and companies to lobby against this hard line. But the second option plays to the strengths of the U.S. and its allies while exploiting the inherent weaknesses of the PRC’s system.

Unfortunately, the default is to pick the former. [...]