Stay or sell? Russia’s war shows the difficulties of nuance in responsible investing

Depending on who you believe, the horror of Russia’s invasion of Ukraine either cast a wrench in the ESG movement or was a moment of maturity for the ideals that underpin it.

Either the idea that investment dollars focused on environmental, social and corporate governance can help change the world for the better has proven desperately exposed to shifting priorities during a rapidly evolving international crisis. Or the idea that companies should consider the concerns of the planet, people and governance as well as the priorities of their shareholders has triumphed, or at least has proven to be more ingrained in the life of the company than we didn’t really think so.

The reality is that both versions can be true.

The corporate response to Russia’s invasion of Ukraine has gone further, faster than most people expected. In the aftermath of the Russian invasion, many doubted that international oil and gas groups would stop operating in the country, despite being intertwined with state-owned groups and individuals with ties to the Kremlin.

There was considerable uncertainty about the taking of action by sectors less obviously linked to the Russian state. But the pullout of energy companies (or most of them) was followed by a slew of consumer goods, professional services, financial, technology, automotive and manufacturing companies that ceased sales, closed stores or withdrew altogether.

You may wonder if ethics, logistical headaches, or fear of legal risk were the motivating factor: most likely a combination of all three. Uniqlo blamed “operational challenges” for a reverse ferret after insisting it should continue to sell Russian customers the clothes they need. Tobacco company BAT took two days to change course, going from continuing operations but suspending investment to a full exit with a downgrade to its growth outlook.

But the exodus from Russia, under pressure from employees, customers and politicians, is a version of stakeholder capitalism, or the idea that a company’s long-term flourishing depends on more than short-term considerations of its shareholders. (This is all the more reason to revise outdated UK company law that incorporates shareholder primacy.)

What’s not clear is where the ESG investing juggernaut, the supposed vanguard and codifier on these issues, has come in. The weight of money flowing into funds that , at some point, were going to ask questions about whether Russia may have played a role. But, argues Steven Fox, managing director of strategic intelligence group Veracity Worldwide, it seems the corporate world acted quickly – which was the “red flag for ESG portfolio managers” then. . And it was surely the opposite?

Crucially, this has exposed the near impossibility of devising the criteria investors should use to draw red lines.

“ESG ratings and ratings have always been a kind of tick box,” says ESG institutional investor adviser Peter Taylor, who says such ratings have historically struggled to analyze, for example, corruption risk. . “It is also easy to exclude whole categories of companies because they are bad or to include them because they are ‘good’, regardless of the behavior of the company.

Hence the challenge of a crisis that upends assumptions about the costs and benefits of domestic fossil fuel production, or the merits of investing in defense enterprises for society. Or it raises questions that require better and more nuanced consideration than that provided by figures pumped from an external data provider.

The problem, according to sustainable finance expert Sasja Beslik, is not just that this data was flawed (and inconsistent) in terms of factoring in risk. It was widely taken at face value as “industry was looking for scalable, low-cost solutions”.

This is a twist on the divest (quick and easy) vs. commit (long and hard) debate that has occupied the sustainability investing world for years. Reducing ESG and business ethics to some sort of utilitarian freshman undergraduate framework that weighs and measures the world in a stop-go system can be useful for selling funds or rounding up reluctant stockpickers.

But it doesn’t handle nuance well. And it does not reflect the broader expectations that politicians, employees and the public now clearly have of investors and companies.

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