[The war in Ukraine has affected the ESG/impact investing community in a number of major ways. First of all, through reduced inflows. The Institute of International Finance (IIF) reported that ESG funds saw inflows halve in Q1 2022 amidst Russia’s war in Ukraine, volatility in ESG heavy tech shares, and higher oil prices diverting funds into non-ESG energy stocks. ESG Q1 fund flows of $75 billion were at their lowest level in seven quarters. IIF data also showed that flows into ESG bonds were also down sharply in Q1, dropping to $14billion from $27billion.
More importantly, Russian aggression has been fostering new intense debates on fundamental socially responsible issues such as whether defense stocks should be allowable in ESG/impact portfolios or, at least, no longer be considered unsuitable as part of a negative exclusion policy. Does Europe’s new geopolitical reality and use in defending democracies force reversals or adjustments to investment firm ESG and sustainability policies?
The war has also become a wake-up call for social investors that their efforts and investment focus not only reside on a sector level. It has also renewed the question of investing into countries like Russia with autocratic governments. According to Bloomberg, ESG funds had at least US$8.3 billion in Russia before the invasion; having invested in Gazprom PJSC, Lukoil PJSC and Rosneft, among others. About 14% of sustainable investment funds are directly exposed to Russia, according to industry research firm Morningstar Inc. Just like social investors did not want their money invested in South Africa during apartheid, will the brutality of the Russian invasion be a catalyst to new restrictions being applied globally to the most autocratic governments? Should social investors consider whether politics and international conflicts should, to some degree, guide their investment decisions?
On another front, while government sanctions and divestment by corporations have demonstrated the power of the capital markets and the commitment of major companies to operate consistent with core values, this raises other investment issues. The main question that reveals itself through this war time environment is How do you calibrate a company’s actions? How do you balance doing the right things like exiting their operations in Russia versus accepting the financial hit that the company took in exercising their social conscience? To what degree do you quantify and reward/punish the net effect of a company’s decision? There will be increased pressure for ESG/impact funds to explain their rationale behind investment decisions as social investors will be questioning whether the money they have put toward environmental, social and governance goals is being well spent.
To dig deeper and get a better understanding of what is happening in the rapidly evolving social investment environment, the Institute for Innovation Development decided to reach out again to a cross-section of socially responsive asset managers—from ESG to impact to focused thematic strategies—and get their real world, in-the-trenches perspectives and thought leadership on these issues. We would like to thank Ultimus Fund Solutions—one of the largest independent fund administrators—who provided introductions to some of their socially responsive asset manager clients and that has created investment vehicles for all of them to enable more access for investors to socially driven investment options.
Let me introduce you to our panel and then we will jump into getting a true lay of the land on these vital issues from the following experts in this field:
Andrea Dalton, CFA, portfolio manager and Kristin Hull, Ph.D., founder, CEO and CIO, Nia Impact Capital Capital, an asset management firm that invests at the intersection of social justice and environmental sustainability. Nia builds a portfolio of forward-thinking companies poised to play a key role in our transition to an inclusive, just, and sustainable economy.
Venk Reddy, chief investment officer of sustainable credit strategies, Osterweis Capital Management, a San Francisco-based asset manager established in 1983, offering both equity and fixed income investment strategies
Matthew Blume, director of ESG research and shareholder activism, Pekin Hardy Strauss Wealth Management, managers of the Appleseed Fund, a Chicago-based independent advisory firm providing funds and separate account strategies for investors that support their values through impact and ESG investing.
Zin Bekkali, CEO, Silk Invest, a London-based advisory firm that invests in listed equities across global frontier markets—predominantly in Africa, the Middle East, Frontier Asia and Latin America—with a strong focus on impact investing and has been a signatory to the UN Principles of Responsible Investing since 2011.]
Bill Hortz: Do you feel that the war in Ukraine has reframed ESG/impact manager and investor perspectives on certain issues? What are these areas and how are they being rethought or refined?
Nia Impact Capital: Human rights have always been a critical element of ESG investing, though it took Russia’s attack on Ukraine to force the topic onto our front pages. As with many ESG factors, the timing of many risk incidents is unpredictable and disregarded at the peril of both investment decisions and often the humans involved. This moment is equivalent to the tide going out, leaving it clear to see where both corporate and investment decisions weighing profit and human rights were too casually considered.
Osterweis: Autocratic governments and military aggression are not new to world history or to ESG investors. The biggest change to investor mindsets here may be in their definition of what countries or conflicts pose ESG (or even financial) risks. We suspect both traditional and ESG investors will rethink the chances that a government which previously seemed unproblematic or at least tolerable could be viewed as an aggressor or revealed to be a human rights violator virtually overnight. In some ways, this may favor companies who are willing to incur the costs of onshoring their previously outsourced business units proactively, which is (at least domestically) a stakeholder treatment issue which may have always been worth watching anyway.
In general, the willingness to take short-term pain for long-term gain is more likely to be a virtue than it has been in the past, which we hope will motivate companies to do so and will motivate investors to stop judging ESG based on short-term performance metrics. We cannot lose sight that ESG represents long-term risk, and it always has in our opinion. So, for ESG managers, I do not believe the war should have changed what we are looking for, just where we are looking; we must always continue to cast a wider net as we aim to identify potential risks to avoid.
PekinHardy: I definitely think the war in Ukraine and the economic and political fallout that resulted has created difficult new questions for some ESG/impact managers to consider. For example, should ESG analysis extend to the country/national level? How would such analysis be carried out, given that most ESG metrics used for company analysis would not be relevant at the national level? What framework would be used? Should companies be held responsible for the actions of the governments of the nations in which they are domiciled? If so, who decides which governmental actions are “acceptable” and which are not?