AP4-backed Northern Trust climate fund takes stake in blacklisted Uighur camp surveillance contractor

The company, which faces US sanctions over severe human rights violations, is included in the fund despite strong ESG screens

An emerging markets green fund has built up a stake worth $1.6m in a surveillance company which is accused of playing a key role in the “arbitrary detention, torture and harassment” of the minority Uighur Muslim population in Western China.

According to US lawmakers, Hangzhou Hikvision – which is 42% controlled by the Chinese state – “assisted officials in the mass detentions and surveillance of ethnic minorities…reportedly winning upwards of $1.2bn in government contracts”. Last year, the firm was placed on a blacklist by the US government, prohibiting it from trading with US companies – the first time the Trump administration has cited human rights as a justification for such a ban.

Annual reports show that the Northern Trust Emerging Markets Quality Low Carbon Fund had acquired an initial stake of 120,500 shares valued at $628,841 in Hikvision by March 2019. The fund has nearly tripled its holdings since then, increasing its position to approximately $1.6m.

The $1.3bn climate fund aims to deliver a carbon intensity reduction of 70% compared to its benchmark, the MSCI Emerging Market index, and was opened for public investment earlier this year.

An earlier version of the fund was established in 2013, with backing from Swedish public pension fund AP4. AP4 has remained a majority investor in the vehicle, with a stake valued at SEK10bn ($1bn).

Although the fund is climate focused, it also claims to have a stringent ESG policy in place – including negative screens for companies in breach of the UN Global Compact.

The Global Compact says “businesses should support and respect the protection of internationally proclaimed human rights” and to “make sure that they are not complicit in human rights abuses”, making the investment in Hikvision a controversial one.

Speaking on the fund's launch at a recent press briefing, Northern Trust Global Investments CEO and Head of EMEA operations Marie Dzanis said: “While everyone is familiar with the E and G criteria, the “S” such as social, workplace policies and the like might be less obvious as it doesn’t show up on the balance sheet until there is an incident in the workplace or until there is a lawsuit.”

Hikvision also features in two other ESG-labelled funds managed by Northern Trust. The Emerging Markets Custom ESG Equity Index fund, which is underpinned by a custom index developed with MSCI ESG Research and Institutional Shareholder Services (ISS), has a $1.7m stake in Hikvision, while the All Country Asia (ex-Japan) Custom ESG Equity Index fund has a $310,000 allocation to the company.

A spokesperson for Northern Trust Asset Management told RI its sustainable investing funds use third-party data and research to establish exclusions for firms with “severe corporate controversies or those that violate the UN Global Compact principles”.

“Within the Northern Trust Emerging Markets Quality Low Carbon Fund’s screening process, a stock needs to have a red flag (severe risk) from the MSCI ESG Rating in order to be screened out, however Hikvision is rated a moderate risk by MSCI and is under ongoing review,” she added.

“In the case of Hikvision, the Northern Trust ESG team actively engaged with ESG research providers to assess the situation. Throughout that time, as well as during our heightened ongoing monitoring of Hikvision, Hermes EOS, our engagement provider for the fund, used the Northern Trust Engagement Policy, which strongly emphasises human rights, to engage directly with Hikvision management. We firmly believe that stewardship can improve company standards and disclosures regarding ESG.”

Tobias Fransson, Head of Strategy and Sustainability for AP4, said the pension fund was “aware of the issues with Hikvision and the Council on Ethics of the AP Funds together with our sustainability consultants have initiated a dialogue with the specific company”.  

“We are also in dialogue with the fund manager, and in general the manager has a very thorough quality screening,” he added. “Their exclusion list is, for example, very extensive with approximately 140 companies.”