On the one-year anniversary of Russia’s initial invasion of Ukraine, EM Senior Sovereign Strategist Tim Ash re-evaluates how the ESG investing landscape has shifted.
The Russia/Ukraine conflict has, I think, demonstrated the newfound power of ESG. This can be broken down into three factors: investors pre-emptive positioning, self-sanctioning, and the impact of powerful ESG considerations.
First, investors who did their ESG homework, and understood the rule of law/governance issues around the Putin regime, reduced their exposure to Russia long prior to the invasion. Albeit now laid bare by the conflict, I think a long march of malign actions against Ukraine and the West, and sanctions in response, previously signposted these concerns. We had been increasingly mindful of growing ESG risks around Russia for some years prior and reduced our exposure to both Russia and Ukraine in the months leading up to the war. Indeed, as far back as 2015, the illegal annexation of Crimea and then the Russian military intervention in Donbas in 2014, followed by the failure to secure meaningful conflict resolution with the Minsk 1 and 2 agreements, signalled that a more defining conflict between Russia and Ukraine was likely. More recently, further evidence suggested that war was imminent – the constant Russian troop build-up around Ukraine throughout the course of 2021, Putin’s penning of an essay in mid-2021, which now seems evident to be his justification for war, and clear warnings of the imminence of a Russian invasion by open-source Western security sources. Wary investors had taken Russia-related risk off the table long before.
Second, and on the focus on sanctions, perhaps the greatest hit to Russia after the invasion was self-sanctioning by Western companies operating there. Many companies, operating in unsanctioned sectors, left Russia because of ESG concerns. They simply did not want the additional ESG headache of trying to explain why they are supporting the Russian economy with their continued presence in the Russian market, while Russia is waging a brutal war in Ukraine. I think this is the first example where Western companies have not only worked to the letter of sanctions rules, but also the spirit in which these restrictions were drawn up and intended.
Third, ESG considerations were, I think, powerful in persuading some of the big market index providers to kick Russia out of various indices in response to the invasions. ESG conscious investors held them to account for not acting soon enough. One could also extend this to ratings agencies withdrawing Russia’s ratings primarily around issues connected to ESG.