The war in Ukraine isn’t good news for ESG either

By Teamspirit on Monday, 18 April 2022

Following the invasion, investment houses are now having to rethink the detail of their ESG policies. Research from consultancy BFinance reveals that as many as 4 in 10 fund managers are now in the process of updating their approaches – and investor outcomes. Especially in the arms and energy sectors.

While negatively screened funds often either limit or wholly prohibit the inclusion of arms, a militarily ambitious Russia whose end-game is still not clear has meant governments are already talking up their need to increased military budgets in response to the threat. This, in turn, is necessitating the potential return of arms manufacturers to funds. A weak defence sector that is increasingly unable to raise capital on the markets to both manufacture and invest in R&D is, after all, in no one’s interest.

Energy providers are also coming under the spotlight. Some because of their origins and connections with Russia – and others because, with Ukrainian and Russian oil supplies either arrested or under threat, ESG fund policies may now need to be tweaked as alternatives are analysed. Russian energy companies such as Gazprom, NK Rosneft and NK Lukoil were all included in ESG holdings as late as March this year.

Human rights is a third area where ESG criteria will need to be reviewed. It was recently revealed that over £7.2bn of investments defined as ‘socially conscious’ were tied up in Russia prior to the invasion (Bloomberg).

In many ways, perhaps changes such as these are inevitable. Not because the conflict could have been foreseen, but because it is just an example of how ESG will need to flex intelligently over time to take on board significant social, political and corporate changes.

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