With the repatriation of Canadians Michael Kovrig and Michael Spavor following their three-year incarceration in China, relations between Ottawa and Beijing are to be reset.

As Foreign Minister Marc Garneau put it, Canada will now coexist, compete, co-operate and challenge China. To do this, Canada should start paying closer attention to the signals its pension fund investments send — particularly when they’re invested in state-owned enterprises in China and elsewhere.

In the case of China, it’s unsustainable to say, on the one hand, that Canada is committed to human rights and appalled by China’s hostage diplomacy, while, on the other, pension funds are pouring billions of dollars into China’s state banks and companies accused of gross human rights violations. With such an incoherent and inconsistent approach, is it any wonder the Chinese government thinks it can detain Canadian citizens on trumped up charges with impunity?

Read: Sino-Canadian relations face a slow recovery, but China remains warm to investors: expert

Remember, it isn’t just any money we’re talking about here — it’s money that belongs to members of the Canadian public. A group that, in general, holds human dignity, freedom and the rule of law to be sacrosanct. I doubt that the return of the Michaels will change the Canadian public’s deep opposition to the enslavement and mass incarceration of the Uyghurs and the Chinese companies involved. Nor should it.

When confronted with the actions of companies in which they hold equity, institutional investors often fall back on a familiar refrain — if we divest, someone less likely to push for reforms is likely to take our place. It isn’t an argument that holds any water.

Pushing for reform through engagement with Chinese companies doesn’t work. Foreign investors will never have the kind of leverage that the Chinese state can bring to bear. This has been made painfully clear to the likes of Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

Read: BCI, CPPIB and OTPP investments tied to human rights abuses in China, finds watchdog

The Chinese government has recently brought these two organizations to heel, forcing them to pay billions to the state for “charitable endeavours.” This has come at the cost of wiping $1 trillion off the value of Alibaba and Tencent, as well as Kuaishou Technology Ltd. and Meituan, in a few short weeks, with foreign investors facing the brunt of the losses.

At Hong Kong Watch, we recently looked at a large German pension provider that took the approach of pushing for reform through engagement. In a report, the provider detailed its discussions with Alibaba and noted that, despite engagement, the company largely ignored calls to improve labour standards or provide further information on the protection of human rights.

When it comes to upholding the environmental, social and governance criteria and in terms of risk assessment, it’s far smarter for institutional investors to divest from Chinese state companies — in particular, those involved in gross human rights violations.

Read: Institutional investors looking to Asia as economies start to bounce back from pandemic

In a recent report issued by my organization, we laid out four criteria for institutional investors eager to capitalize on the returns generated by the Chinese economy without being complicit in the ruling party’s human rights abuses.

The first is to avoid making investments in companies that have been blacklisted by the U.S. government. The list includes a number of state-backed companies with close ties to the People’s Liberation Army.

The second is to steer clear of the Chinese technology giants complicit in human rights violations in Xinjiang. Many mainstream Chinese firms, particularly the technology giants, have been involved in the creation of the Xinjiang surveillance state, prison camps and the use of forced labour.

The third is to avoid investing in the country’s state-backed banks. These financial institutions bankroll the country’s state-run enterprises. They’re also beneficiaries of foreign institutional investments — in fact, the Chinese Construction Bank is one of the top 10 constituents of both the MSCI emerging markets index and the FTSE Russell emerging markets Index. As a result, these equities are prominent in global pension funds around the world.

Read: What trends should investors watch in China’s economic recovery?

The fourth pillar would be to avoid investments in China’s fossil fuel giants. Firms looking to invest in the Chinese economy should be considering the role of state subsidies in the Chinese fossil fuel industry as they make their ESG calculations.

For example, the China Petroleum and Chemical Corp. — better known as Sinopec — is the largest oil and gas refining company in the world. It has close links with the Chinese military and state, even developing body armour for the Chinese military. Last March, it announced plans to refine natural gas and crude oil found in the Uyghur region in Xinjiang — where over a million Uyghurs are currently incarcerated.

As Canada seeks to reset its relations with China, it must urgently review its pension fund investments in China. Our report shows that ignorance is no longer an excuse when it comes to bankrolling companies complicit in gross human rights violations.

Read: Canadian pension portfolio exposure to China inching higher

Sam Goodman is the senior policy advisor at Hong Kong Watch.

These are the views of the author and not necessarily those of Canadian Investment Review.