Major US financial firm gives blacklisted Chinese companies higher ESG ratings than Amazon, Meta

Morningstar, a major U.S. financial services firm, has given lower "risk ratings" to multiple Chinese companies that are blacklisted by the federal government than well-known American companies.

The Chicago-based firm subsidiary Sustainalytics, a platform that assesses how well publicly-traded companies conform to environmental, social and corporate governance (ESG) standards, routinely gives the companies relatively high marks despite their involvement in human rights violations and connection to the Chinese Communist Party (CCP), according to a FOX Business review. Ratings on the platform can have a significant impact on investor and consumer behavior.

"I think from a national security perspective, there needs to be soul-searching of why Chinese companies get a pass within ESG," Richard Goldberg, a senior adviser at the nonpartisan think tank Foundation for Defense of Democracies, told FOX Business in an interview.

"Why isn't China a high risk environment from the get go?" he continued. "And any company that is based there, that is controlled by the CCP, that is a state-owned enterprise in a country like China — how could that not immediately be a high risk company? That doesn't make sense."

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The Sustainalytics ratings platform contradicts two lists assembled by the Department of Defense (DOD) and Department of Commerce (DOC) identifying entities that present a national security risk. Overall, there are at least four companies on the DOC list that are given "medium" risk assessments and at least five companies on the DOD list given "low" or "medium" risk ratings. 

For example, Zhejiang Dahua Technology, a facial recognition software company based in Beijing, has a "low" ESG risk rating of 15.4. The company, though, is listed on the DOD's list and sells its services to Chinese police agencies that use it to detect racial characteristics of individuals caught on camera and identify Uyghurs, a persecuted minority Muslim group who mainly live in the western region of Xinjiang.

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The company, which is partly owned by the Chinese government, was exposed for its work with law enforcement to track minorities in 2020, according to multiple reports.

Similarly, iFlyTek, a Chinese voice recognition company that is also partially state-owned, has collaborated with China's Ministry of Security in Xinjiang and has been listed by the DOC. But Morningstar gave the company a "medium" risk rating of 24.6. 

In 2017, Human Rights Watch warned that iFlyTek's technology could represent a major threat to privacy when leveraged by the government. The group also reported that iFlyTek has a contract with Xinjiang police as the supplier of voice pattern collection systems.

"The Chinese government has been collecting the voice patterns of tens of thousands of people with little transparency about the program or laws regulating who can be targeted or how that information is going to be used," Sophie Richardson, the China director at Human Rights Watch, said at the time. 

"Authorities can easily misuse that data in a country with a long history of unchecked surveillance and retaliation against critics."

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Another Chinese company, BGI Genomics, was given a "medium" risk rating of 21.4 by Morningstar. However, the company has been placed on both a blacklist by the DOD and DOC because of its work developing technology to track genetics of Uyghurs.

In addition, China Electronics Technology Group Corp, Fiberhome Telecommunication Technologies Co., Guangzhou Haige Communications Group Inc., China Unicom, China Mobile and 360 Security Technology have all been flagged by the U.S. government, but have received "medium" risk ratings between 23 and 30 by Morningstar.

Meanwhile, Amazon and Meta have been given "high" ESG risk ratings of 30.3 and 34.5 respectively, according to Morningstar. American energy companies like ExxonMobil, Chevron and Marathon Oil have been assigned even higher risk ratings.

"Morningstar Sustainalytics’ ESG Risk Ratings measure a company’s exposure to subindustry-specific material ESG risks and how well a company is managing those risks, i.e., for each subindustry we take into consideration a set of material ESG issues most relevant for the companies in that subindustry," Sarah Cohn, a spokesperson for Morningstar Sustainalytics, told FOX Business in an email.

"We combine the concepts of management and exposure to arrive at an absolute measure of risk, which can be compared across subindustries, sectors, companies, and regions, across our research universe," she continued. "By taking a material ESG issue focus with our ratings, we highlight what companies are doing or not doing to manage risks effectively, which includes business controversies."

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Cohn added that the blacklisted Chinese companies are in different subindustries and, therefore, may be exposed to different inherent risks. She noted that Meta, as an internet software and services company, was more vulnerable to certain risks other companies aren't exposed to.

"Meta’s high ESG Risk Rating reflects the company’s exposure and management of their material ESG issues and the fact the company has been implicated in multiple severe controversies which increases its ESG risks," Cohn said. "For example, we have Meta rated at a Category 4 level for both its Data Privacy and Security and Quality and Safety."

However, Goldberg from the FDD has found in his research that Morningstar often determines its ESG ratings of companies using non-transparent research that is vulnerable to significant bias. 

"Until the politics of Russia changed in the United States, ESG firms were broadly providing good ratings to Russian firms — even those that had connections to the Russian government and were already subject to various U.S. sanctions," he told FOX Business.

"All these ESG firms are now sort of playing catch up to say, 'oh, I guess Russia's bad so we're going to have to start figuring out how to ding companies that are contributing to the occupation of Crimea and in some ways helping Putin in his war against Ukraine," Goldberg said. "That's only in the last six months since people started exposing the fact that ESG firms had good ratings for Russian companies."

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In August, a coalition of 18 Republican attorneys general opened an investigation into how Morningstar's Sustainalytics ratings system had an apparent anti-Israel bias. The first-of-its-kind investigation alleged that Morningstar was engaged in consumer fraud or unfair trade practices by unfairly rating businesses.

Over the last several months Republican lawmakers and state officials have aggressively pushed back against the so-called ESG movement which aims to promote environmental and social policy changes at corporations. They have particularly aimed their ire at institutional banks like BlackRock, which has been accused of altering investments worth trillions of dollars based on ESG standards, and ratings firms that determine ESG ratings.

The Biden administration has taken a number of steps through the Securities and Exchange Commission and Department of Labor to boost ESG standards and sustainable investing.