There has been a slew of divestments from Russia this week spurred by a global campaign to put financial pressure on the country following its invasion of Ukraine.
ESG Clarity has found that while some are looking at the barriers to how fast they can divest, others are already questioning who would pick up these unpopular holdings – if anyone.
There have also been a large number of Russia-linked funds suspended – some due to managers’ taking a moral stand on the conflict, others due to practical or risk factors.
Reuters reported on Wednesday that more than $3bn in assets had already been frozen in Russian-focused funds offered by managers including Amundi, BNP Paribas, HSBC and Pictet.
On Wednesday, MSCI announced that it is moving its Russia indexes from emerging markets to standalone status on 9 March. The index provider received “feedback from a large number of global market participants, including asset owners, asset managers, broker-dealers and exchanges, with an overwhelming majority confirming that the Russian equity market is currently uninvestable.”
MSCI also downgraded the ESG government ratings for Russia and Belarus, changing them from BBB and BB, respectively, to B, the second-lowest rating, with a negative outlook. It has also begun a “sovereign watch” event assessment and period to closely monitor MSCI ESG government ratings for Russia, Belarus and Ukraine. This will allow the ratings agency to react to major events which would fall outside its usual annual ESG government ratings process.
Legal and General Investment Management announced Russian securities were now out of step with its ESG measures.
“The invasion of Ukraine contravenes almost every measurable ESG metric. LGIM has already, where possible, reduced our clients’ exposure to Russian securities,” the company said in a statement.
Financial activism
The financial activism has also been seen by ratings agencies adjusting for the financial risk now posed by the region and doing what they can to bring about peace.
Fintech company All Street downgraded the overall rating of all stocks listed on the Moscow stock exchange to zero following Russia’s onslaught, and the firm also decided to override the algorithms of its artificial intelligence ratings system, Sevva, to reflect this decision. In a statement, All Street said: “The move reinforces that investors should not be allocating capital towards Russia, in light of the current risks to European and world peace.”
Emanuela Vartolomei, founder and CEO of All Street, appealed to investors’ moral duty to “weaken Putin’s regime” and take “urgent action” to help those affected by the conflict.
“I strongly condemn the devastating decision taken by Putin to invade Ukraine and feel a personal responsibility to take practical action,” she stated.
Trading conditions
There have also been asset managers reducing their strategies’ exposure to Russia or suspending Russia-linked funds due to systemic constraints, like the Moscow stock exchange being closed. As ESG Clarity sister publication, Portfolio Adviser, reported, JP Morgan Asset Management told shareholders of a suspended Russia-linked fund the abnormal market trading conditions meant it could not be managed in line with the investment objective and policy.
Many funds, ESG and non-ESG “are making moves to reduce or eliminate their exposure to Russian securities. Some of this is motivated by client demand, i.e. large institutional investors want to divest. Some of this is motivated by a shift in the asset manager’s assessment of ESG risks associated with Russian securities,” said Alyssa Stankiewicz, lead sustainability analyst for manager research, North America, Morningstar, in an email. “However, some firms are finding it practically impossible to divest given the exchanges are closed, and others have expressed concern about the unintended consequences of sudden divestment, i.e. the buyers of these securities may be very aligned with Russia’s current foreign policy agenda, thereby adding fuel to the fire.”
There is speculation about the sell-offs that will occur when the Moscow stock exchange opens again. It remains closed on Thursday. In the meantime, Russia has announced it is temporarily stopping foreign investors from selling Russian assets while they are under “political pressure,” as the Russian prime minister described it.
BP’s big sell
One of the biggest stories in Russia divestment has been oil and gas giant BP‘s sale of its roughly £6bn stake in Russian fossil fuel company Rosneft.
However, this has raised questions surrounding when and how BP could sell the stake, and who is buying. With the reputational and financial risk associated with Russia-targeted sanctions, the options for buyers are limited.
BP is understood to be prepared to walk away from the stake even though it could mean a financial hit of up to $25bn for the company.
With the BP-Rosneft scenario playing out for so many holdings right now, the Russian government has decreed it will step in to buy up shares in Russian companies, making use of its 1trn roubles ($9.3bn) sovereign wealth fund, according to Reuters.
Hedge funds
Scott Levy, CEO of fixed income structuring firm Bedford Row Capital, pointed to the ongoing need for capital for companies that are being impacted both through concerted divestments and from plunging investor confidence in the region.
He used the example of Ukrainian company Kernel, which produces about 8% of the world’s sunflower oil.
“They need money to function and the world needs their products. So where’s that financing going to come from?
“Hedge funds, presumably, will pick up the funding – but the cost of doing that is going to go through the roof.”
Levy said where hedge funds do fill this chasm in financing, their higher cost of capital will drive up inflation.
Hedge funds had been seeking opportunities in Russia already this year as tensions between Russia and Ukraine were increasing, according to the Financial Times, which reported a number of hedge fund managers speaking of bargains while institutional investors were getting nervous.
Development
Levy pointed out that unlike with divesting from fossil fuels, for example, we could see a relatively rapid return to Russia and surrounding markets, and that may become an active ownership opportunity to align finance with the UN Sustainable Development Goals (SDGs).
“Out of all this bad news, at some point, as soon as we start reinvesting in those markets, though the standards with which we employ money will be different,” Levy said.
With the difficulties investors have in measuring SDG 16, about peace, justice and strong institutions, he is not convinced it will become an explicit focus in light of this conflict. However, he said he was hopeful targeting other, more measurable, SDGs could have a knock-on effect for peace.
Tribe’s chief impact officer, Amy Clarke, emphasised how, when reinvestment in Russia begins, it will be crucial capital reaches those drawn into poverty from sanctions.
“As is the case with all forms of conflict (social, economic, political and environmental) it is often those who have contributed the least to a situation who suffer the worst impacts.
“Using the global finance system to increase accountability and encourage behavior change can be a powerful approach if exercised wisely and with focus.
“But this can also push people into poverty, many of whom may not have been benefitting from finance’s economic contribution pre sanctions. It is vitally important to recognize this and move to support people in these situations as much as possible,” Clarke said.
