Coutts & Co., the centuries-old wealth manager whose clients include Queen Elizabeth II, said Vladimir Putin’s war on Ukraine is putting pressure on ESG funds to justify their use of the label.
It’s now clear that hundreds of funds touting environmental, social and governance goals failed to dodge the autocratic regime behind Europe’s worst military conflict since World War II. Funds marketing themselves as ESG held about $8.3 billion in Russian assets right before the war, including state-backed energy giants and even bonds issued by the Kremlin, according to data compiled by Bloomberg.
The war “has questioned ESG funds,” said Karen Ermel, responsible investing director at London-based Coutts, which oversees about $46 billion in assets.
The wealth manager has spent recent weeks talking to staff and clients to get a clearer picture of allocations and expectations, she said. Fund managers have been required to prove their portfolios don’t contain any hidden exposures.
Questions have centered on, “You are ESG, so how are you demonstrating it?” Ermel said in an interview in London.
Coutts stands out as one of the world’s oldest wealth managers, with its origins dating back to the 17th century. It’s been serving British monarchs since the 18th century, when Queen Anne became a client.
The war is fast becoming a transformative moment for the ESG industry, whose rapid growth has propelled it into a $40 trillion juggernaut, Bloomberg Intelligence estimates. The rapid pace of growth has led to a more elastic definition of ESG, with an ever greater universe of financial products and strategies using the label.
At Coutts, exposure to Russia going into the war was negligible, at around 0.1% of total assets, and the few Russian holdings it had were all unwound in the first week of March, according to the firm’s website. For non-Russian companies that have operations in Russia, Ermel said Coutts is now “engaging with them.”
An event like this “tests people’s approach to ESG,” she said. “It’s very difficult for retail investors to figure it out because you have such a knowledge gap” between individual and professional investors, she said.
To be sure, even ESG professionals have a hard time agreeing on a common definition of ESG, which has grown much faster than the regulatory framework intended to rein it in. It’s part of the reason why some ESG investors ended up in Russian oil stocks, while others shunned such sectors altogether.
Researchers at Morningstar Inc. have said it’s wrong to “conflate sustainability and ethics.” Others in the industry, such as fund manager Mirova, have said ESG is incompatible with autocracies. Paul Clements-Hunt, who coined the term ESG almost two decades ago, has said the industry’s track record is proof that ESG fund managers have broadly “failed.”
According to Ermel at Coutts, “there’s no black and white.”
“You want to tell a very clear story,” she said. “But it isn’t a clear story, often.”
This article was provided by Bloomberg News.