Xinjiang: the S in the middle of ESG


Companies facing the challenge of exemplary social behaviour


By Stanislas Coquebert de Neuville, portfolio manager at Lazard Frères Gestion

Several major textiles brands have been boycotted in China for halting cotton purchases from Xinjiang. Behind the geopolitical stand-off is a new challenge for companies: assuming their commitments in the social arena that is dear to investors keeping a close eye on the respect of environmental, social and governance criteria.

The fire took just a few days to spread: on 22 March, the European Union, the UK, Canada and the US announced sanctions against China for suspected repression of the Uyghur minority in Xinjiang. In retaliation, several western clothing and sporting goods brands present in China were boycotted in view of accusations that they had cut their cotton supply from China a few months earlier.

The obligatory choice of ethical sourcing

All of the groups targeted by the boycott belong to the Better Cotton Initiative (BCI), an independent organisation created with the backing of two NGOs in 2009, to establish social and environmental standards in the cotton chain. Belonging to this initiative was not just a question of image for these companies. Their aim was also to meet the high demands of western investors, who are increasingly taking into account environmental, social and governance (ESG) criteria in their asset management choices. The companies therefore pledged to procure socially responsible cotton.

At end-2020, in the light of the suspected use of forced labour in Xinjiang, the BCI requested that its members no longer purchase cotton from the region. Shortly afterwards, in January 2021, one of the last decisions made by Donald Trump was to ban cotton imports from Xinjiang into the US. The situation then propelled the members of the BCI into the centre of Chinese-Western diplomatic tensions. H&M became the prime target of the boycotts. Several of the banner’s stores in China remain closed since 29 March. The brand’s e-commerce app was deleted from mobile platforms and all of its stores were dereferenced from Chinese geolocation apps. Other fashion and sports groups are suffering or could suffer similar fates, especially if the US continues its project to extend the current ban to all goods produced in Xinjiang.

The groups concerned therefore find themselves stuck between a rock (ESG) and a hard place (China). Refusing to purchase cotton from Xinjiang means losing part of their Chinese customer-base. Choosing the opposite is not really an option however: for these companies, it would imply a U-turn on ethical sourcing questions by alienating themselves from both western customers and a non-negligible share of investors. The choice therefore goes without saying, even if it means lower profits in the short term.

Social issues on a par with environmental protection

Since the 1990s, the world has changed considerably. The image of multi-national groups with little sensitivity in terms of child workers in Asian factories is now a thing of the past. The change in investor attitudes has clearly contributed to this. The Xinjiang cotton affair shows to what extent socially responsible investment (SRI) as well as the ESG criteria on which it is based, now weigh heavily in favour of more ethical choices for multi-national groups.

The situation could nevertheless seem paradoxical. Being more demanding in terms of social criteria means renouncing a share of immediate profits. Investors know this, but prefer to focus on the long-term improvement in image by being proud to favour, at their level, the inclusion of more ethical values. Note that risks for western companies relative to Chinese sanctions also remain well controlled. Boycotts of western products are nothing new. Dior, Uniqlo, Toyota and KFC have already been the object of boycotts in China in the past, for very different reasons. Apple was also threatened last year. Experience has shown that Chinese boycotts are generally short-lived, with a fairly limited financial impact.

One thing is sure: the Xinjiang cotton affair above all testifies to the huge importance that the social part of the ESG acronym has for companies. For a long time, investors above all associated the three letters with environmental criteria. In their eyes, the companies the most advanced in terms of ESG were companies that made the most efforts in terms of their carbon footprints. It is now clear that the social dimension is on a par with the environmental dimension in terms of corporate ethics.


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Article written on 31 March 2021. The information provided is not intended to constitute investment advice and is intended for information purposes only. The data used in this document is used in good faith, but no guarantee can be given as to its accuracy. All data contained in this document, unless otherwise indicated, comes from Lazard.

Sources: Lazard Frères Gestion

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