ESG investors struggle to find the right balance to do good – and solar panels show why

The Intergovernmental Panel on Climate Change issued a stern warning this month that human-induced warming resulting from the burning of fossil fuels is causing climate change and that the removal of carbon emissions will stop warming.

This makes the transition to renewables like solar power even more urgent. However, reports that China has forced Uyghurs to work in labor camps to manufacture key ingredients for solar panels put socially responsible investors in an awkward position between weighing up climate disaster prevention and supporting human rights. the man.

Moreover, human rights defenders pushing for better treatment of the ethnic group inadvertently suffered a setback with the US withdrawal from Afghanistan. Now that the Taliban has regained control of Afghanistan, China may have heightened concerns about a surge in militancy in Central Asia, near Xinjiang, home to Uyghurs, who are Muslims, a religious minority in China.

All of this underlines the limits of investing according to environmental, social and governance principles. Global supply chains are often murky and opaque, as many clothing manufacturers have learned. Some issues may be better resolved by governments rather than winning board seats or otherwise influencing company strategy. At the best of times, change can take years, but sometimes change never happens despite the efforts of activists. And ESG promoters must regularly weigh competing concerns, in this case environmental and social interests, and decide where they can have the most influence.

Read: “ESG” and sustainability mentions are made on thousands of business results calls

Labor allegations in China

While concerns that Uyghurs were working in forced labor camps had existed for several years, a report from Sheffield Hallam University earlier this year found a link to the solar industry. The report, “In Broad Daylight: Uyghur Forced Labor and Global Solar Supply Chains,” details accusations that the Chinese government has placed millions of indigenous Uyghur and Kazakh citizens of the Xinjiang region in labor camps to extract polysilicon , a key material in the manufacture of panels.

The Chinese government characterizes these camps as a voluntary, government-backed poverty reduction effort and a means of combating terrorism. Authorities repeatedly deny all allegations of human rights violations.

About 95% of solar modules depend on polysilicon, the raw material to create solar cells, and according to the report, polysilicon manufacturers in the Uyghur region account for around 45% of the global supply of solar grade. “In 2020, China produced an additional 30% of the world’s polysilicon in addition to that produced in the Uyghur region, a significant proportion of which may also be affected by forced labor in the Uyghur region,” the authors say.

The United States has recently started paying more attention to products imported from the region that could be turned into forced labor. In June, the Biden administration banned the import of solar panels and other goods produced by Hoshine Silicon 603260,
+ 10.00%,
a Shanghai-listed company that produces and sells silicon-based materials and operates factories in Xinjiang. The company has a market value of around $ 22.2 billion, but less than 13% of its shares are freely traded. It represents a small portion of US solar imports.

The United States has also imposed restrictions on four other silicon producers in Xinjiang, including Daqo New Energy Corp. 688303,
a $ 3.35 billion company that is one of the largest polysilicon producers in the world and has an ADR listing in the US DQ,
+ 2.53%

The Solar Energy Industries Association, a US industry group, is encouraging companies to move supply chains out of the region and sign a pledge to prevent forced labor, among other actions. To date, more than 280 companies have signed this commitment, including the utility Duke Energy DUK,
+ 0.31%,
Tesla TSLA,
+ 1.01%
(which acquired SolarCity in 2016 and is now part of Tesla Energy) and JinkoSolar US, the American subsidiary of Chinese panel builder JKS,
+ 7.15%.

ESG managers in difficulty

Chris Meyer, head of stewardship investment research and advocacy for Praxis Mutual Funds, a faith-based ESG fund, says the report’s findings help illustrate gray areas of investing and that global supply chains are complex and often opaque.

“This is not what we want to see associated with solar. I say we in the ESG community more broadly, and also at Praxis, but I think we’re better at knowing that because we can start dealing with it now, ”he says.

But at the same time, he adds, “that’s no reason to avoid renewable solar power altogether. The world is in the process of climatic triage.

Praxis is working with utilities to phase out coal-fired power plants and switch to renewables in a way that supports utility workers and the communities where the power plants are located in a “just” transition that ensures that people in all walks of life participate in a carbon-free economy.

This is another reason why the Uyghur situation is delicate for ESG funds. Although the use of renewable energy is growing in the United States, “we don’t want it to come at the expense of people or the planet on the production side,” he says.

Meyer says Praxis is stepping up advocacy with its portfolio companies in the solar supply chain, but it’s difficult. He declined to name which companies. “It’s a pretty crude problem right now,” he says.

The limits of ESG investing

There are limits to what fund managers can do and the remedies are complex. A European environmental institutional fund manager who has no direct exposure to investments in Xinjiang says that normally ESG fund managers advocate with companies to improve company behavior for the benefit of all stakeholders, but this situation is different because the fate of the Uyghurs depends on the Chinese government. .

“There is absolutely no way that, because the US utilities are not using the polysilicon from Xinjiang, the Chinese government will change its policy,” the fund manager said, adding that even though solar power manufacturers leave the country, Uyghur life will not change.

The US government only recently voiced concerns about China’s treatment of Uyghurs. After the terrorist attacks of September 11, 2001, the Bush administration sought help from China in the fight against terrorism to fight al-Qaeda. In 2002, the Bush White House designated the “Islamic Movement of East Turkestan” as a terrorist organization, blaming it for terrorist attacks, including arson and assassinations in China. The group is a target of Chinese counterterrorism and has used it to justify the crackdown on the predominantly Muslim Xinjiang region. The US State Department removed the group from its terrorist list in November 2020, saying there was no credible evidence the group still existed.

Potential profit for US based solar generation

Of course, ESG investors could seek out other solar panel manufacturers to support their environmental interests. There is some push towards solar production in the United States, and in June, four Democratic senators introduced the Solar Power Manufacturing Act for America to give tax credits to American manufacturers while along the solar manufacturing supply chain to increase domestic solar generation capacity. But building an industry from scratch will take time.

Cindy Bohlen, research analyst at Riverwater Partners, an ESG financial advisor, says there could be an opportunity for a company like First Solar FSLR,
benefit from investor interest in a US-based solar panel manufacturer. First Solar, which has a market capitalization of around $ 9.9 billion, uses a thin-film manufacturing process, rather than polysilicon. However, it is more expensive to produce than polysilicon panels.

“It seemed to us that this whole situation would present a good opportunity for them,” said Bohlen, noting that his company had so far not invested in any solar stocks and continued to do their due diligence.

Meyer says the rate of renewable energy development may slow as the industry tries to make sense of the Uyghur problem, but that won’t stop the facilities. The price of panels may go up, but he still believes renewables will remain competitive with fossil fuels.

“I don’t think it’s going to significantly change the trajectory we’re on for the adoption of cleaner energy,” he says.

Debbie Carlson is a MarketWatch columnist. It does not own any of the funds or stocks mentioned in this article. Follow her on Twitter @ DebbieCarlson1.

More from Debbie Carlson

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What New Amazon CEO Andy Jassy Needs To Do To Become A Sustainability Leader Like Apple

Goldman Sachs launches ESG ETF with one size fits all approach and any size

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