Somewhere in the fine print of America’s largest retirement funds, a quiet scandal is unfolding. Millions of Americans who believe their savings are invested in socially responsible, environmentally sustainable companies are unwittingly financing the military modernization of the Chinese Communist Party. The vehicles for this transfer of wealth are Environmental, Social, and Governance funds — the Wall Street product category that has exploded in popularity over the past decade by promising investors that their money will do good while doing well. By the end of 2025, ESG-labeled funds held approximately $10.2 trillion in assets under management globally, according to the Morgan Stanley Institute for Sustainable Investing. But a growing body of evidence suggests that the ESG label is, in many cases, little more than a marketing veneer stretched over the same index-fund strategies that have always prioritized returns over principles.
The most damning evidence came from the U.S. House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party, which conducted a bipartisan investigation into American asset managers’ investments in Chinese companies linked to the People’s Liberation Army and human rights abuses. The committee’s findings, published under the title “Unconscionable Profit: Fueling China’s Military,” revealed that major asset managers had facilitated $6.5 billion in investment to 63 Chinese companies that had been blacklisted or red-flagged by the United States government for their connections to China’s military apparatus. BlackRock and Vanguard combined accounted for $3.8 billion of that total — roughly 59 percent — channeled through index funds and ETFs that millions of ordinary Americans hold in their 401(k)s and IRAs.
Following the Money
The specifics are striking. The Coalition for a Prosperous America, in a detailed report submitted to Congress, found that MSCI — the index provider whose benchmarks underpin trillions of dollars in passive investment — had facilitated $3.7 billion in capital flows to entities directly boosting China’s People’s Liberation Army. BlackRock’s offshore funds held approximately $130 million invested across 14 companies designated as Chinese Military-Industrial Complex entities, spread across stock exchanges in Hong Kong, Shanghai, and Shenzhen. These positions would be illegal if held directly by American investors under existing sanctions, but the offshore fund structure creates a legal gray zone that asset managers have been content to exploit.
Even within domestic funds marketed to American retail investors, the holdings are troubling. BlackRock’s iShares MSCI ACWI ETF — a global benchmark fund that many financial advisors recommend as a core portfolio holding — includes positions in Tencent Holdings valued at $125.5 million, Alibaba Group at $83.6 million, and China Construction Bank at $31.5 million, according to publicly available fund holdings data. The iShares Core MSCI Emerging Markets ETF, with $70.9 billion in assets, was found by the House Select Committee to hold $556 million — approximately 0.78 percent of the fund — in companies that had been blacklisted or red-flagged as Chinese military firms.
Public pension funds are similarly exposed. California’s CalPERS, the largest public pension fund in the United States and the retirement vehicle for millions of state employees, invested $282 million in HongShan, a Chinese firm with documented Communist Party links and military-related ties, according to reporting by GV Wire in November 2025. Historically, CalPERS has held shares in at least 172 Chinese companies with a total market value of $3.2 billion.
The Environmental Contradiction
The irony of ESG funds investing in Chinese companies extends well beyond the military dimension. The “E” in ESG stands for environmental, and China is, by every meaningful measure, the world’s most prolific polluter. The country accounts for approximately 30 percent of global carbon dioxide emissions. In 2025, China proposed 161 gigawatts of new coal-fired power capacity — a record high, according to the Centre for Research on Energy and Clean Air and the Global Energy Monitor. China added roughly 74 gigawatts of new coal capacity in 2025 alone, the highest figure in a decade. These are not the actions of a nation committed to the environmental principles that ESG funds claim to champion.
Yet the ESG framework, as currently constructed, does not meaningfully penalize this behavior. The ratings methodologies employed by firms like MSCI have been criticized for failing to capture the human rights track records and environmental records of Chinese companies accurately. The system relies heavily on corporate self-disclosure, and Chinese state-owned enterprises are under no obligation — and have no incentive — to provide the kind of transparent reporting that would reveal the true extent of their environmental and social impacts. The result is a rating system that assigns passable scores to companies operating under an authoritarian government with no independent judiciary, no free press, and no civil society organizations capable of holding corporations accountable.
The Political Reckoning
The political response has been slow but is gathering momentum. The House Select Committee’s investigation was notably bipartisan, led by Chairman John Moolenaar, a Republican from Michigan, and Ranking Member Raja Krishnamoorthi, a Democrat from Illinois. Moolenaar stated plainly that “it is unconscionable for any U.S. company to profit from investments that fuel the military advancement of America’s strategic competitor.” Republican state attorneys general have begun scrutinizing asset managers’ China-linked holdings, and the Trump administration indicated in 2025 that it was examining public pension funds’ exposure to Chinese military-linked investments.
The asset management industry’s defense has been predictable: index funds are passive vehicles that track established benchmarks, and excluding specific companies would deviate from the index methodology and potentially harm returns. This argument might hold water for conventional index funds that make no pretense of social responsibility. But ESG funds are marketed explicitly as vehicles for values-aligned investing. They charge higher fees on the premise that they screen for environmental, social, and governance factors. When those screens fail to exclude companies linked to the Chinese military, Uyghur forced labor, and record-breaking coal expansion, the entire ESG proposition collapses into a marketing exercise.
The fundamental question is whether ESG investing is a genuine framework for responsible capital allocation or merely a rebranding strategy that allows Wall Street to charge premium fees for the same products. The evidence increasingly suggests the latter. American workers saving for retirement deserve to know that their money is not financing the military buildup of a strategic adversary or underwriting the world’s largest coal expansion program. They deserve transparency, accountability, and fund managers who take the promises on their marketing materials as seriously as they take their management fees. Until that changes, the three letters E, S, and G will remain what they have become for much of the industry: an expensive fiction.