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Russia’s invasion of Ukraine has exposed the failings of asset managers and data analytics firms in their assessment of environmental, social and governance risks, according to a senior sustainable finance executive.
Vladimir Putin’s war in Ukraine has prompted some asset managers to stop new investments in Russia, while others have said they will divest from the country when they are able to do so.
However, Sasja Beslik, a sustainable finance expert, said the war showed that ESG investors “have failed” by not managing risks associated with Russian investments before the latest invasion.
Beslik said companies should have learned from Russia’s annexation of Crimea in 2014.
This article was previously published by Ignites Europe, a title owned by the FT Group.
Most fund managers and ESG analytics firms “did nothing” eight years ago, said the former head of responsible investments at Nordea Asset Management.
The “tragedy” in Ukraine was therefore a “warning signal” for all those working within ESG in financial services, he said.
Asset managers’ over-reliance 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 integrate it into their portfolios, with very few doing detailed analysis themselves, he said, adding that what MSCI and other companies were doing had a “tremendous impact on asset managers” and the cost for their clients was “quite significant” if they had relied on the data for their Russian investments.
“ESG data firms need to look at [the war in Ukraine] and ask themselves what they have missed,” he said.
Beslik cited MSCI’s decision to downgrade its ESG rating of the Russian government from 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” relating to both individual companies and the firm’s methodologies.
A spokesperson for Sustainalytics added that it carried out event assessments following earlier waves of sanctions after the Russian annexation of Crimea in 2014 and the intensification of the armed conflict in the eastern part of Ukraine in 2018.
Georgia Stewart, chief executive officer of Tumelo, a responsible investment technology provider, said the investment industry’s response to Russia’s attack on Ukraine had highlighted that negatively screening stocks and excluding them from funds was a “regressive and never-ending endeavour”.
“Defence and fossil fuel companies will exist whether or not the good guys invest in them. What’s 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 promise of ESG is to manage the down and upside of 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 UK government, says its decision to end its Russian investments on March 1 was unusual in considering the “moral case” in addition to the financial one.
“Nest isn’t an ethical investor. We’re a committed responsible investor that seeks to achieve the best long-term returns for members by operating a global portfolio and managing key ESG risks to the portfolio,” a spokesperson for the scheme said.
However, ShareAction, a responsible investment campaign group, said responsible investors needed to “go beyond managing financial risk” and “take responsibility for the impact their investments have in the world”.
“Investors do not operate in a vacuum. Decisions taken, or not taken, 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 will be with making a financial return,” a spokesperson said.
ShareAction stopped short of calling for a complete divestment from Russian entities beyond sovereign bonds and state-affiliated companies.
Total divestment from all Russian companies “could have negative impacts on Russian people while having little effect on the military or political regime”.
*Ignites Europe is a news 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.
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