This week, I want to share some reflections on how ESG and war interact.
The Russian invasion of Ukraine has had countless impacts around the world. Clearly filled with tragedy, this situation has also made some people wonder how both companies and investors who have strong views on ESG would react to it.
Hundreds of companies have withdrawn from Russia, many of them without knowing when and if they will ever restart their operations there. This includes Mexican companies as well (like Bimbo). Big investors and asset managers are receiving a lot of heat for their positions on Russian assets too. According to Bloomberg, ESG funds had at least US$8.3 billion in Russia before the invasion, and with the market in Moscow closed it is unknown how much this has changed (if at all). The question is, if when allowed to, will they dump their positions or not? An even bigger question is should they have left Russia years ago on serial human rights violations?
Since this is the first war in Europe since ESG became a bigger trend in the markets (and you could argue Europe is where ESG is more advanced in the world), many people believe how this plays out will mark the ESG movement for the future. Here are some questions that I think provide interesting food for thought:
· Should the defense sector be a pariah for ESG investors? Some ESG investors are already changing their minds on this.
· Will this war trigger a faster transition towards clean energy? It seems likely, at least in some regions, that this will happen. But faster does not necessarily mean fast (i.e., change will not come immediately).
· Should political risk and international conflict be a bigger part of ESG assessments? Some ESG data providers had been warning about controversy risks in Russia for a while since the annexation of Crimea, but that didn’t stop ESG investors to buy into many Russian securities. Should these risks be deal breakers in the future? And if so, where in the world are there other countries that could be shunned by ESG funds with this kind of rules?
· Can stewardship activities help in this kind of situations? Stewardship is a fundamental part of responsible investing. It helps industries develop towards more sustainable practices, and it positions investors as drivers of change instead of just selectors of what already is good enough. Having said that, this situation shows that stewardship is not always powerful enough. The influence companies may have on governments’ actions in some countries is simply too limited. This does not mean responsible investors should care less about stewardship. I think it means stewardship is a long-term game and for certain situations its benefit is limited.
· Are past investments partly funding this war? There is a lot of discussion on whether funds that were still invested in Russian assets (including government-issued bonds) helped to indirectly fund this war. Or even now investment banks that have exited Russia but continue to trade on Russian securities could be providing liquidity that is helping the Russian government continue its local narrative. However you want to think about it, this war will very likely lead to increased pressure for ESG funds to explain their rationale behind investment decisions.
I sincerely wish this humanitarian tragedy comes to an end sooner rather than later. In the meantime, let’s learn the lessons that need to be learned.
I hope you found this interesting. As usual, if there is anything we can help you with, please reach out.
CEO, Miranda ESG
Contacts at Miranda Partners