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Russia’s invasion of Ukraine has exposed asset managers and data analytics firms’ failings in their assessment of environmental, social and governance risks, according to a senior sustainable finance executive.
Vladimir Putin’s war in Ukraine prompted some asset managers to halt new investments in Russia, while others said they would divest from the country when they were able to do so.
However, sustainable finance expert Sasja Beslik said the war has shown that ESG investors “failed” by not managing the risks associated with Russian investments before the latest invasion.
Beslik said companies should have learned from Russia’s annexation of Crimea in 2014.
Most fund managers and ESG analysis firms “did nothing” eight years ago, said the former head of responsible investments at Nordea Asset Management.
The “tragedy” in Ukraine was therefore a “wake-up call” for everyone working at ESG in financial services, he said.
Asset managers’ overreliance on ESG data analytics firms, such as MSCI and Sustainalytics, had also become part of the problem, Beslik said.
Most asset managers use third-party data and incorporate it into their portfolios, very few perform detailed analysis themselves, he said, adding that what MSCI and other companies were doing had a ” huge impact on asset managers” and the cost to their clients. was “pretty significant” had they relied on the data for their Russian investments.
“ESG data companies need to consider [the war in Ukraine] and wonder what they missed,” he said.
Beslik cited MSCI’s decision to demote his ESG rating from the Russian government of B to CCC on March 8, saying, “This came eight years too late.”
Sustainalytics said it was reviewing its ESG risk ratings and country risk ratings “in light of the conflict in Ukraine” regarding both individual companies and company methodologies.
A spokesperson for Sustainalytics added that it had made assessments of events following previous waves of sanctions following Russia’s annexation of Crimea in 2014 and the escalation of armed conflict in the east. Ukraine in 2018.
Georgia Stewart, managing director of Tumelo, a responsible investment technology provider, said the investment industry’s response to Russia’s attack on Ukraine has highlighted that negative screening of stocks and their exclusion from the funds was a “regressive and endless enterprise”.
“Defense and fossil fuel companies will exist whether the good guys invest in them or not. What is important is that they are tightly controlled by responsible shareholders who engage thoughtfully with boards,” she said.
Beslik said ESG considerations related to Russian investments had “nothing to do with morals”.
“The ESG promise is to manage the risks and opportunities associated with the investments we make on behalf of our clients, including where they operate,” he said.
Nest, the workplace pension scheme set up by the British government, is rare to clarify that its decision to end its Russian investments on March 1 was not taken for ethical reasons.
“Nest is not an ethical investor. We are a committed responsible investor that seeks to achieve the best long-term returns for its members by managing a global portfolio and managing key portfolio ESG risks,” a holder said. program speech.
However, ShareAction, a responsible investment campaign group, said responsible investors should “go beyond financial risk management” and “take responsibility for the impact of their investments on the world”.
“Investors do not operate in a vacuum. The decisions made or not made have an impact on the world around us. The truly responsible investor will be as concerned about the social and environmental impacts of their investments as they are about realizing a financial return,” a spokesperson said.
ShareAction refrained from calling for a full divestment of Russian entities beyond sovereign bonds and state-affiliated companies.
Full divestment from all Russian companies “could have negative impacts on the Russian people while having little effect on the military or political regime.”
*Ignites Europe is an information service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.