ESG’s place in the Russian invasion of Ukraine

Ignore the headline noise, and stick to the standards.

The Russian invasion of Ukraine is making some investors look into the conflict through the lens of ESG. We have already seen the economic fallout in the financial markets and beyond, first from the Russian publicly-traded companies becoming virtually untradable and the ruble crashing. Next came the big U.S and European companies, one by one pulling their products and services from the Russian market. As more costs continue to mount, many are raising the questions of ESG investing’s place in the Russian invasion. Two analysts at Citi are going as far as to suggest that weapons and military stocks should be included as a part of ESG investing because these companies are “Defending the values of liberal democracies and creating a deterrent, which preserves peace and global stability.”

Against this backdrop, it would be time again to review what ESG investing is and what it is not.

ESG investing is NOT synonymous with ethical investing. While there is a subset that makes investment decisions based on value-based principles, ESG stands for Environmental, Social, and Governance. Our goal is to act on information that is fundamental and material. The ongoing conflict in Ukraine would certainly seem to fall under the above criteria, but ESG follows a standard framework. Actions that are taken by a sovereign regime fall outside the scope of material ESG risk and squarely into political and country risks, and increasingly, physical risks.

Below, one can see the key ESG issues under each pillar from a few of the major rating agencies. While a rating agency based on their quantitative and qualitative assessments may have a different ESG score for a company, thematically, the issues are similar across the board. It is also important to note that the material risk posed by each issue varies across sectors and industries.

So going back to how to deal with investing in the new reality where Russia is invading Ukraine, we can see that geopolitical considerations fall outside of bread-and-butter ESG issues. But that should not stop an investor from making other risk assessments or value-based judgments. For that, we already have some well-known exclusion lists that exclude companies that are perennial offenders in terms of material ESG issues, including those in certain problematic regions and regimes with a history of human rights violations, for example. The Norges Bank’s list of excluded companies is well respected by institutional investors.

This is just one of the many ways investors approach ESG investing, which has real and meaningful consequences for businesses. That is why it is more important than ever for a company’s management and board to stay up to date on salient ESG trends, issues, practices, and regulations.