angle-left null Moving Beyond Huawei

Moving Beyond Huawei

Manager Insights Article ESG Active Equity
July 2019
Moving Beyond Huawei

Mellon believes that focusing on material and relevant environmental, social and governance (ESG) information provides insights beyond those gleaned from financial analysis alone. Consequently, we have made the deliberate decision to imbed ESG analysis throughout our research and investment processes. While the recent US ban on Chinese telecom provider Huawei still dominates headlines, there are a slew of other companies that could suffer the same fate. This paper explores the primary ESG considerations of Hikvision, China’s largest supplier of video surveillance equipment and the country’s largest surveillance provider.

The magnitude of investment in the technology industry and recent anxiety about the effects of trade disputes seem to have overshadowed some important ESG issues in this space. Specifically, we believe that ownership structure, data privacy and human rights have the potential to significantly impact shareholder value. However, these issues may be overlooked by those whose investment decisions are balance-sheet centric. We see implications of each of these issues in Hikvision.

Ownership

Shareholder rights are a concern. Hikvision is a state owned enterprise (SOE), meaning the Chinese government retains a controlling stake. Generally, SOEs lack board independence and diversity, two characteristics correlated with better financial performance. In addition, shareholders face the risk that the government will either exert too little oversight or too much control based on political, rather than business, motivations.

Data Privacy

Government intervention in the case of negative externalities is a well-established precedent in developed markets. However, cyber-security remains relatively untested in some regions. Consumers are increasingly protective of their personal data, including images. However privacy rights, such as those related to surveillance, are ill-defined and differ culturally, politically and legally by country.

Hikvision, in concert with Nvidia, provides the technology to easily and successfully identify people, places and things. What ultimately happens to this data is an area of growing concern, and the company’s inability or unwillingness to protect the data it collects may result in public backlash, regulatory constraints and/or decreased shareholder support. Each of these consequences may be exacerbated by perceived improper or abusive use of data generated and stored by Hikvision.

Human Rights

Media reports have indicated that Hikvision’s technology has been used to identify members of the Ughyur Muslim population, a group thought to be the target of state-sponsored ethnic cleansing and retraining. Although the Chinese government denies these allegations, connection to potential human rights violations on this scale weighs on the company’s value.

Evaluating Hikvision’s technology’s potential, along with its risks, requires a thorough understanding of the product’s use cases, as well as the existing and potential controls governing its use. At Mellon, our analysts must have both the expertise to place a given technology in its proper context and the imagination to envision the outer bounds of its employment.

Investment Analysis

Our understanding of a company’s product or service offerings, corporate management, social license to operate, regulatory constraints and ability to control its strategy is critical to assessing the investment opportunity. For Hikvision, we need to understand the technology, its potential and the ethical challenges inherent in its proliferation. The insights gained by examining Hikvision’s governance structure, as well as the social implications and applications of its work, are all relevant considerations when formulating our investment thesis.

Understanding those issues that will influence corporate behavior or alter the landscape in which a company operates is critical to developing a cohesive investment thesis. In the case of Hikvision, ownership structure, data privacy and human rights are the ESG issues of greatest concern to us. For another company, operating in another context, the issues will be different. Mellon’s analysts are experts at identifying and evaluating the most material and relevant potential ESG considerations for a given company.

Disclosures

This article is not strategy specific and is intended solely to highlight the firm's ESG effort. Listed securities are for illustrative purposes only and are not a recommendation to buy, sell, or hold these securities. Investments in the securities identified may not be profitable. Some listed securities are a part of our investable universe and may be held in our portfolios.

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