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How the Russian War Blinded the World of ESG Investment

Article authors:



Rothkerber and Tommy Wilkes

Boston / London — Russia's invasion of Ukraine has exposed a socially oriented investment gap – a practical approach to geopolitics and human rights ..

Before Moscow sent troops to Ukraine on February 24, the Kremlin-backed bank Sberbank was already subject to international sanctions, from some western lenders. Also, the evaluation of environmental, social and governance (ESG) risks was high.

MSCI Inc and Sustainalytics improved their ESG scores for Russia's largest creditors last December, citing factors such as improved data privacy. S&P Global Inc also gave Sberbank a positive review at the end of last year.

After rating agencies attack, downgrade, or suspend the scores of Sberbank and other Russian government-affiliated companies due to pressures such as exposure to new western sanctions. , Immediately changed course.

The U-turn has sparked a call from some investors to review how geopolitics, sovereign governance and human rights are incorporated into ESG ratings.

The first step is to include a war warning sign, to be able to sell the stock ready for sale, and is the Co-Chief Investment Officer of Envestnet Inc's Asset Management Division. Dana D'Auria says.

"It wouldn't have been great to sell Russian stocks before they froze," Dauria said. She and Envestnet refused to discuss a particular holding.

Sustainalytics' ESG research director, Simon MacMahon, is a "black swan event" because invasion into Ukraine is a "black swan event" due to its low probability and high impact, and investors invest in the region. Risk.

"It makes no sense to suggest that investors rely solely on ESG ratings for the ever-increasing risk of investing in Russia (Belarus) and Ukraine." He said.

Still, Morningstar-owned Sustainalytics is redefining its methodology to understand the company's exposure to unpredictable and unmanageable events.

The new "systemic event indicator" is defined as "an ocean change event that is inherently unpredictable and at the same time affects more corporate groups across a number of ESG issues." The purpose is to capture development. ..

Sustainalytics gave Sberbank a pre-intrusion 21.47 score, better than the scores given to JPMorgan and Deutsche Bank at the time. Later, the risk rating of Russian banks was raised to the current "high risk" rating of 33.4, incorporating new systematic indicators.

MSCI said it upgraded Sberbank from "BB" to "A" in December, but regularly reviewed its rating method, capped Russian corporate ratings and removed it from the index. Stated.

MSCI spokesperson Melanie Blanco has an average low ESG rating for state-owned enterprises in all markets covered by MSCI, which typically leads to weak corporate governance and high risk of corruption. It is due to. A spokesperson for

S&P said he was still considering the scope and methodology of Russian-affected companies, but did not discuss the details of the rating.

Autocratic risk

Exclude companies from countries with weak human rights records or undervalued funds are held in ESG investments It's just a small part of the tens of trillions of dollars.

Meggin Thwing Eastman, Managing Director of MSCI, said Russia's invasion has forced "rethinking the mindset of many" in geopolitical assessments, while investing in many emerging markets (EMs). The house sometimes told Reuters that it wanted exposure to the country. Poor human rights record.

"If you want to buy EM, it's part of what you're buying," she said.

However, there is a growing demand for strategies with human rights screens.

Julie Cane, CEO of Democracy Investments, an investment adviser to the $ 5 million Democracy International Fund, said there has been a flood of new interest and influx since the invasion of Russia. According to Ripper's data, this year we raised $ 3 million in net new deposits, including $ 1 million each in February, March and April.

The fund will reduce the weighting of some of its holdings if the company's home country gets a low score in The Economist's Democracy Index.

Still, there remains exposure to country-related companies, including China, where international pressure on human rights in the Xinjiang Uygur Autonomous Region is increasing.

Kane said it would be better to maintain such a stake, but diminished "to pressure authoritarians to become better citizens of the world."

China's Ministry of Foreign Affairs and the Council of State Intelligence Bureau did not respond to requests for comment.

The United States states that China is genocide against Uighur Muslims in the Xinjiang Uygur Autonomous Region. Beijing has denied all accusations of abuse.

Another fund, the $ 220 million Freedom 100 Emerging Markets ETF, takes a tougher line. Companies in countries with low scores on the "Human Freedom" scale maintained by the Cato Institute and Fraser Institute are excluded.

This is unusual among EM funds because it omits Russian and Chinese holdings. Fund manager Perth Toll said the Russian invasion helped raise new money. So far this year, we've spent $ 117 million, according to Ripper's data.

"The aggression seems to make investors more aware of the risks of dictatorship than ever before, and they see freedom as a key indicator," Toll said. Said.

Moscow calls the invasion a "special military operation" to protect Russian speakers from the Ukrainians Russia trying to take Kyiv to NATO. The West and Ukraine state that Russia is waging an unjustified war of aggression.

Russia's exposure

Indeed, most ESG-focused funds had little or no exposure to Russia. As of March, nearly $ 320 million of securities related to the Russian government, including sovereign debt and shares of Zubelbank and other state-owned enterprises, are 75 ESG-labeled US and European, according to corporate accountability NGO Inclusive Development International. It was held in a fund.

According to Sustainable Research and Analysis, approximately $ 100 billion is held in passive managed funds linked to sustainable indexes created by MSCI and others.

Some ESG evaluators have flagged sanctions on Russian companies connected to the government prior to the invasion, but the impact of these assessments was limited. Note that on November 29, the S&P unit was credited to Sberbank for conducting a risk assessment and strategic planning.

This memo warned of Russia's corruption and centralization, but "currently, including banks on the international sanctions list is a valid business operation. Imminent financial or operational risk that does not affect sex. ”

Zubelbank, despite being on the US and European Union sanctions list in 2014 after Russia merged Crimea. Reported that it grew over the next seven years, maintained a significant presence in some European markets, and increased net profit by 74%. 2021 record 1.24 trillion rubles.

Sberbank said in a statement that the "impressive progress" in the 2021 ESG rating reflects "internal ESG transformation efforts and sustainability leadership in Russia." .. We did not answer any specific questions regarding the rating. (Report by Ross Kerber in Boston and Tommy Wilkes in London. Additional report by Simon Jessop in London and Ryan Woo in Beijing. Edited by Greg Roumeliotis and Carmel Crimmins.)