Why did WisdomTree remove these firms from its indexes?

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WisdomTree Removed Chinese Firms Due to ESG Downgrades Over Censorship Concerns

WisdomTree Investments removed Tencent Holdings, Baidu, and Weibo Corp from two of its indexes due to their downgrading by Sustainalytics, an ESG ratings unit of Morningstar. Sustainalytics classified these Chinese firms as "non-compliant" with the second principle of the United Nations Global Compact, which addresses complicity in human rights abuses, citing their role in China's increasing internet control and censorship.
Sustainalytics' Downgrade Rationale

Sustainalytics downgraded the three companies from a watchlist to a non-compliant status. This decision was based on the firms' significant roles within China's societal and information services infrastructure, coupled with an increased scope of allegations concerning censorship. Sustainalytics noted that the censorship practices have expanded, impacting a wider array of stakeholder groups, including the banning and severe censoring of various messaging groups and accounts on platforms like Tencent's WeChat and Weibo's microblog service.
The United Nations Global Compact Principle

The second principle of the United Nations Global Compact, which these companies were found to be non-compliant with, states that businesses should ensure they are not complicit in human rights abuses. Sustainalytics' assessment indicates that Tencent, Baidu, and Weibo, through their operations within China's stringent censorship regime, are considered to be in violation of this principle by facilitating or enabling such abuses.
WisdomTree's Portfolio Management Process

Liqian Ren, who manages WisdomTree's China investments, explained that the removal of Tencent, Baidu, and Weibo was a direct consequence of Sustainalytics' assessment. WisdomTree follows a systematic process where companies deemed non-compliant by Sustainalytics' criteria are removed from its portfolios. This approach underscores the importance of ESG compliance in the asset manager's investment decisions, particularly concerning companies operating under strict regulatory environments.
Broader ESG Standards Divergence

The downgrades highlight a significant divergence in environmental, social, and governance (ESG) standards between Western countries and China, particularly concerning social and governance issues. While China states its commitment to ESG principles, its domestic standards, especially regarding internet freedom and human rights, differ considerably from those promoted by international bodies like the UN Global Compact and assessed by Western ESG rating agencies. This creates challenges for global asset managers seeking to align their investments with international ESG frameworks.

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Why did WisdomTree remove these firms from its indexes?

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