ESG Criteria Signal To Divest Communist Debentures

ESG Standards Are Going to Be a Challenge for Chinese Companies - EqualOcean
Source:equalocean.com

Recently, the regime of the Communist China (i.e., the People’s Republic of China or PRC), hereafter referred to as the “CCP regime”, published a series of regulations open to comments in order to persuade foreign investors into trading debentures or bonds. The debentures under the rules of the CCP regime include government bonds or gilts, enterprise bonds, mid-term notes, etc.

Because of investment in debenture issuers in the Communist China ruled by the Chinese Communist Party (CCP), the reputation of an ESG (i.e., Environmental, Social, and Governance) investor will suffer. ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

This article examines the violations of the ESG criteria in the Communist China, signaling investors to divest the Communist debentures.

Environmental criteria violation

Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there any issues relating to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?

The funds generated from debenture issuance are mostly used for infrastructure and property construction projects that cause damage to the environment and increase carbon emissions.  Infrastructure and property construction activities require a large quantity of steel and iron.

China Macro & Metals: Steel output falls, but property creates bright spots
Source:blogs.platts.com

Steel is an alloy based primarily on iron. The crude steel production by the Communist China ranked number one in the world in 2018 and 2019 respectively.

Global crude steel output increases by 3.4% in 2019 | worldsteel

As iron occurs only as iron oxides in the earth’s crust, the ores must be converted, or ‘reduced’, to iron using carbon. The primary source of this carbon is coking coal.

Furthermore, coal is the main energy consumed by the Communist China.

Raw Data: Coal and Renewable Energy Production in China – Mother Jones
source: motherjones.com

Carbon is the main ingredient (about 75%) of coal, with the remaining 25% consisting of other elements such as ash, oxygen, hydrogen, nitrogen, sulphur. Therefore there is no surprise that the Communist China is the main contributor of global CO2 emission.

Each Country's Share of CO2 Emissions | Union of Concerned Scientists
source: ucsusa.org

Because coal contains Sulphur, sulfur dioxide is emitted through the burning of coal from power plants, industry, locomotives, and ships. The sulfur dioxide then finds other atmospheric molecules in the air, combines with them, and forms sulfur-containing particles. And they contribute to acid rain, haze and smog, all of which cause respiratory complications and exacerbate existing health conditions such as asthma. In fact, these particulates are considered to be the air pollutants with the greatest public health impact.

Technology in the Communist China is generally energy inefficient because of slack and unprofessional environmental protection enforcement, hence much more energy will be consumed for each item manufactured in China. The more investments in the Communist China, the more carbon emissions in the world. In terms of environmental protection enforcement, the CCP gangsters are more interested in interrupting ordinary citizens’ living by banning family cooking and heating using coal and inflating energy prices. At the same time, the systematic monopoly of electricity supply in the country makes it difficult for renewable energy producers to sell energy to energy consumers. As a result, solar energy and wind energy generators can’t survive without fiscal subsidy, despite that there is a tremendous consumer passion for low carbon generation and scale economy by serving a large population. Subsidy grants left the CCP gangsters with huge corruption opportunities. Some renewable energy enterprises survived by cheating bank loans, issuing new shares to investors via IPO or cheating investors via issuing debentures, etc.

The goods manufactured in the Communist China using outdated technology cause large scale environmental pollution. The CCP gangsters protected polluters and suppressed dissidents violently. Many people, including one of my relatives, in China became ill due to pollution. As a result of a monopolized medical industry and CCP’s corruption, ordinary impecunious people will have to pay a high cost to see a doctor for medical treatments while senior CCP gangsters can enjoy free advanced care. Therefore, the more goods made in China as a result of investments, the more pollution in China and in the world, and ultimately the higher medical cost the ordinary Chinese people will have to pay.

Irresponsible construction activity also destroys the natural environment by causing landslides, reducing vegetation cover and inducing biological damages to the ecosystem.

Since there is no free press, no free speech, and no rule of law in the Communist China, the voice of the environmental pollution victims has been completely silenced by the CCP.

Social criteria violation

Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?

The debenture funds financed through gilts have been and will be used by the CCP to enforce National Security Law in Hong Kong, enslave Muslims in Xinjiang and Mongolians, suppress protest of dissatisfied property purchasers, and force lockdown without welfare supports in Wuhan. As mentioned above, CCP relies heavily on coal for energy and steel production, and therefore the CCP uses debenture funds to crush any protest in Xinjiang so that it can ensure its energy supply at low cost.

Suppression of dissatisfied property purchasers may cover up overstated revenue included in an income statement and may also cover up understated provisions or contingent liabilities. It’s usually required that no revenue should be recognized before the control over the property is transferred to the client and that provisions or contingent liabilities concerning warranty obligations for the sold properties should be provided.

Before construction work commences, it’s usually required to perform forced demolition of homes to give space for construction sites. Many videos at GNews showed that the CCP police gangsters used arms to conduct forced demolitions by treating the affected home owners unfairly and badly.

Preview(opens in a new tab)

Resource: https://gnews.org/371927/

Because of that, there is a huge risk of diminishing return as a result of the increased demolition cost subsequently incurred/realized in the project invested through debentures.

Particularly, the CCP regime has been using various resources to fund its coronavirus bioweapon manufacturing program and to cover up the truth of the pandemic resulting in a global disaster to human being. It has been clearly depicted in Dr. Li-Meng Yan’s first Scientific Report that COVID-19 was made from a government laboratory in Wuhan.

It has been reported in the videos of both WarRoom and Lu De that no effective vaccine has been successfully developed yet to counter the coronavirus pandemic. But the CCP regime has forced Chinese people to inject the ineffective and unsafe vaccine, which causes greater harm.

The CCP funded by debentures threatened the peace in the South China Sea by building military bases there and carrying out military provocations with the weapons bought with the debenture funds, threatened the security of the entire region including Taiwan, Japan and India, and even coerced some European countries and Australia.

Resource: https://gnews.org/371927/

Governance criteria violation

With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don’t use political contributions to obtain unduly favorable treatment and, of course, don’t engage in illegal practices.

When making decisions about debenture investments, investors need useful information and a sound investment environment established on the foundation of democracy, rule of law and free speech and free press.

Information includes both financial information and non-financial information. Financial information includes what financial statements present, valuation of collaterals, grading information and so forth. Useful financial information must be relevant and faithfully present what it purports to represent in conformance with Conceptual Framework for Financial Reporting issuedby the International Accounting Standards Board in September 2010 and revised in March 2018. But one can’t count on the CCP to present useful and reliable financial information. As reported in Important WSJ Article on Accounting Fraud in China on 7 August 2019 by DayTrading.com, rampant accounting fraud and financial reporting improprieties of the CCP controlled companies can’t be ignored when making investment decisions. Another article Analyzing Chinese Financial Reporting Posted by Chris Devonshire-Ellis on 7 February 2011 at China Briefing also revealed financial information misstatements of the CCP controlled companies.

Because of censorship in the Communist China, whatever negative information, whether extracted from the analysis of financial statements or whistleblowing information misstatement, is deleted very soon or directly blocked when it is posted at Weibo, WeChat or blog websites. If the negative information concerning issuers is not deleted but discovered and reported by issuers to a Public Security Bureau, the posters will be disappeared by the CCP police gangsters. It’s said that Twitter and Facebook also cooperate with the CCP by submitting information of dissidents and silencing truth tellers. However, GNews provides a reliable platform to uncover the true financial information of China. Twitter, Facebook and Gnews are all blocked by the Great Firewall (GFW) in the Communist China. Only those Chinese with an effective VPN can overcome the GFW barrier.

Lack of an independent legal system and democracy makes it difficult to uphold rights of investors, whistleblowers, independent financial analysts, independent auditors, independent journalists, highly ethical financial accountants, chief executives, board directors, and so on. Wang Jian and Chen Fenjian, chairs of the HNA and China Railway Construction Boards respectively, died of “accident” or “suicide”. Dictatorship also extended out of its border. In Pressured by China, E.U. Softens Report on Covid-19 Disinformation reported by the New York Times on 24 April 2020, the CCP reacted swiftly and effectively to tamp down Western criticism of its pandemic response to revise a news report.

Both equity valuations and gradings need to consider information included in the financial statements and therefore the valuations and gradings of the CCP controlled companies are deliberately inflated. What makes matters worse is that the CCP deliberately injected “fluids” or bubbles to inflate the value of assets, most of which are collaterals to debt vehicles.

It’s reasonable to expect that investments on debentures of the CCP controlled companies will yield a huge principal loss and the funds from debenture holders is to be used to commit human rights abuses and destroy the earth.

Author: CPA Jim

Proofreading by: XlBrother

(The (The content of the article only represents the author’s opinion)

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