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March 16, 2022

Ukraine crisis puts financial firms’ ESG promises to the test

Banks and investors may talk about the importance of governance, but some firms have been quicker than others to scale back on their Russian operations and investments.

As thousands of families shelter in the basements of east Ukrainian cities, investors are looking to restrict Russian business interests funding brutal aerial and artillery assaults on civilians.

“This war will make people much more conscious of how their capital is deployed and the broader context of how economies are run,” says James Bevan, former investment boss at CCLA and Santander, and now advising two major UK families with global interests.

The transformative environmental, social and governance (ESG) trend of investment, in particular, will experience a “big shift” from mere “labels on the can” to demands from investors monitoring the “deep and real consequences of the allocation of their capital”, he says.

The effects of Russia’s illegal military tactics go much further than creating the humanitarian disaster we witness on our screens. Bevan points out longer-term consequences for the environment and infrastructure from Russian assaults on nuclear hubs, including the south-east Ukraine-based Zaporizhia power station, Europe’s largest.

Staff there have been forced to work at gunpoint by Vladimir Putin’s forces since March 4. “Had the attack caused a direct hit on the emergency power supplies of the reactor, the core could have experienced a meltdown and exploded,” says Bevan. “That could have breached the containment structure and caused a substantial radioactive leak.”

In conversations with clients, Bevan assigns an “uncomfortably high” 10 per cent chance of a “nuclear event” over the next 12 months.

Progress is slow

The investment sector is, however, moving very slowly. Deutsche Bank says it is not “practical” to close its Russian business, while Swiss wealth and asset manager Pictet’s suspension of calculation of valuations, plus “subscription, redemption and conversion” of shares in its Russian Equities fund appears to be as much down to “liquidity constraints” as the “current political situation” between Ukraine and Russia.

Emerging market specialist Ashmore describes a “desperate” situation in the besieged port city of Mariupol, where over 1000 dead bodies have been found in the street, alongside a mounting national refugee crisis. More than 2mn citizens have been displaced to neighbouring countries, with numbers expected to double in coming days. Ashmore predicts a looming energy and food crisis, as grain exports from both Ukraine and Russia, together representing 25 per cent of the world’s total, are called into question. The firm, however, declines to comment on specific holdings, blaming a “fast-moving” investment environment.

Some believe Russia’s power in hydrocarbons – at a timewhen most fund managers are paying only lip service to ESG criteria – will still attract investment. “There seems to be a presumption in financial services that Russia is down and out and does not stand a chance,” says Michael Mainelli, director of London think-tank Z/Yen Group. “But if Russia wanted to set up a petro-rouble, backed by real oil, this can be traded outside of Swift with Iran and China in a parallel system. When Venezuela did a similar thing, the Russian government provided technology. I can see some real kickbacks here.”

Investment squeeze

Others are more confident of a clampdown on Russian investments and are trying to facilitate this. Both JP Morgan and Goldman Sachs have announced their withdrawal from Russia. UK tech start-up Tumelo, which monitors pension schemes’ stock exposures, has launched a platform enabling investors to ascertain which exchange-traded funds are invested in Russian companies. Investors can visit their website to check this and request relevant fund managers and index providers to review their holdings.

“By committing to remove these companies from indexes and funds, the economic consequences could play a role in persuading Mr Putin to halt his attack on Ukraine,” says Tumelo founder Georgia Stewart, who plans to engage with private banks on ethical issues.

“The major question in the financial world is ‘can you invest in Russia?’ In every single asset management firm, people are looking at Russian assets as incredibly cheap,” says Jean Keller, CEO of Geneva-based boutique Quaero Capital. “But if you take energy and the military sector out, there is very little structure, and it’s pretty much each to their own. All those fund managers who talk about investment philosophy and process, how can they justify investing in a country which has enormously visible disregard for any kind of governance?”

Extensive sanctions, including the freezing of assets controlled by oligarch Roman Abramovich, owner of Chelsea Football Club and branded as being pro-Kremlin, has also surprised Putin, who has taken “Russia’s high investment grade, cast-iron, fortress economy to the point of financial and economic collapse,” according to BlueBay Asset Management’s senior emerging market analyst Timothy Ash.

“The reason for the aggressive sanctions regime was the Ukrainians and president [Volodymyr] Zelensky capturing the world’s imagination. They won the information war. They made it absolutely crystal clear this was a David and Goliath battle, and they embarrassed the West into coming out with some pretty extreme sanctions on Russia.”

Calling out for cash

An injection of Western money from investors and financial institutions, including the IMF, is also needed to prevent the Ukrainian economy from collapse. “Ukraine and Ukrainians are fighting and dying for us; for the defence of Western liberal market democracy,” says Ash. “And if we are unwilling to provide MiG-29s or enforce ‘no-fly’ zones, at least give them the cash needed to pay their soldiers money that still has value. Otherwise, we will see financial and economic collapse, which will make the current crisis multiple times worse and likely will hasten Putin’s victory.”

For the desperate inhabitants of the eastern city of Severodonetsk sheltering from a daily onslaught of Russian bombs, any measures that strangle the Russian economy and boost that of Ukraine cannot come soon enough.

“This is our fifth day without heat, electricity or any ability to watch the news,” said one 38-year-old woman on Friday, speaking to Sustainable View’s sister publication PWM, who was forced to flee with her family from advancing Russian troops and Russian-backed militias in 2014. They now face a second stint on the road as refugees. “We are being bombarded constantly by Smerch and Grad rocket launchers. But we pray and believe in victory against the invaders.”

A service from the Financial Times