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Hong Kong's nationwide safety regulation can scare socially aware buyers and set off outflows

Investors who take a sustainable approach to capital allocation could re-evaluate their money after Hong Kong's implementation of a national security law, an analyst said on Friday.

"This is the only area of ​​international capital flows that could be of great importance," said Andrew Collier, managing director of Orient Capital Research, a research company.

Sustainable or "ESG" investment factors in a company's environmental, social and governance ratings. These strategies vary and are subjective, but generally aim to make socially conscious investment decisions.

There were protests in Hong Kong for more than a year, which sometimes turned violent as residents resisted the erosion of freedom in the city. Critics say the recently implemented central government's national security law in Beijing grants extensive powers to curb dissent in Hong Kong.

Secretary of State Mike Pompeo called the law "draconian" and said it "ended free Hong Kong". Prior to the implementation of the Chinese law, the US Senate passed a law that imposes sanctions on people or companies that "do a great deal to prevent China from preserving Hong Kong's autonomy."

"It is one thing for Congress and Trump to make political statements. It is another thing for the funds themselves in Europe and the United States to take a position based on the optics to support an increasingly oppressive political climate" Collier told CNBC's "Street Signs" Asia. "

On Tuesday, HSBC investor Federated Hermes said in a statement that he was concerned about the bank's support for the new law.

"We expect companies to support improvements in protecting citizens and not to support their removal," said Roland Bosch, financial services industry leader at Federated Hermes. Bosch is responsible for corporate commitments in Europe and the United States.

HSBC did not immediately respond to a CNBC request for comment.

This could only be the tip of the iceberg, Collier said. He suggested that other funds could be driven by unions. For example, retired teachers' funds are likely "not very happy with what's going on in Hong Kong," he added.

Large funds could begin to readjust investment protocols and operations in Hong Kong, which will affect the city's position as an international financial center, Collier said.

In early June, Aviva Investors raised similar concerns about HSBC and Standard Chartered before the law was implemented.

The company, a top shareholder in both banks, said it was "uncomfortable" with public support for the law. It is expected that "both companies will confirm that they will also speak up publicly if there are future abuses of democratic freedoms in connection with this law."

Banks declined to comment on CNBC when this statement was reported.

– Abigail Ng from CNBC contributed to this report.

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