(Bloomberg) — Just before President Vladimir Putin launched a war on Ukraine, fund managers raving about environmental, social and governance standards had at least $8.3 billion in Russian assets.
The figure is based on an analysis by Bloomberg of approximately 4,800 ESG funds, representing more than $2.3 trillion in total assets. About 300 of them were in direct contact with Russia, although this figure could be higher.
After nearly two weeks of war, those assets are likely to be worthless. Investment managers based out of Russia say the ESG fund should never have been in the first place in the country. Philippe Zouti, chief executive of Mirova, a $30 billion permanent-investment arm affiliated with Natixis Investment Managers, said ESG fund managers need to stick to democracies and avoid autocracies.
“If there is no democracy there is no responsible investment,” he said.
Read more: ESG finds itself at crossroads after Putin’s investment in Russia
“We have always thought that ESG was a question of honest intention to use finance to do something good; if it is not then it is a technical management or investment style,” he said in an interview last week. Together, we see very clearly that the intentions of some ESG funds and managers are honest, and others apply just one technique.”
The Bloomberg analysis also found that at least 13 of the ESG funds holding Russian assets were classified as so-called Article 9, a category within Europe’s Sustainable Finance Disclosure Regulation that mandates the highest levels of stability. It reflects. Another 137 funds were labeled Article 8, which indicates to investors that they “promote” ESG characteristics.
“Given Russia’s aggression in Ukraine, it is highly inappropriate for these funds to include Russian sovereign bonds or state-owned energy companies that are funding the war directly,” said EU Policy in the non-profit ShareAction said Maria van der Heide, head of the on LinkedIn.
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With sustainable investments now a $40 trillion industry that has been embraced by the world’s largest financial firms, it is being applied to almost all markets and investment products. Banks deal in ESG derivatives, while asset managers track a vast array of indices from providers such as MSCI Inc. that offer varying degrees of ESG alignment.
MSCI, which last week said it was removing Russian equities from its emerging markets gauge, has more than $16 trillion in assets benchmarked to its products in total. It said the move came after backlash from market participants, who said that Russia’s equity market is “currently not investable.”
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Many ESG funds that say they are now stuck in Putin’s Russia track such indexes, in large part because the supply of green or social assets has actually not kept up with the breathless boom in investment demand.
Bard Bringdal, chief investment officer at Storebrand Asset Management, said the war in Ukraine has caused ESG funds to suffer “one of the most extreme external examples” of an “extraordinary” phenomenon.
Storebrand, which oversees more than $110 billion in assets from Norway, has exposure to Russia through the MSCI index, though Bringdal said his firm could deviate from those benchmarks if internal analysis shows that It makes sense to do so.
“The nature of emerging markets is that there is a higher risk of exceptional events occurring after an investment,” Bringdal said. “This risk is partly rooted in potential returns.”
Mirova’s Zouti said Russia’s war on Ukraine shows that ESG funds can no longer ignore the political background against which they are investing. He and others also argue that the same logic should apply to assets from China, which Mirova has blacklisted.
“Autocracy, democracy, human rights – these are topics that are nowhere in the ESG analysis today,” he said. “If you look at what ESG managers do on human rights, they usually try to avoid any political statements.”
ESG investors buying Russian assets are now being urged to take a stand. According to Johan Frijns, executive director of the non-profit Banktrack, “it is time to break ties and wait for regime change.” “Everyone, including bankers and investors, should do whatever they can.”
– With assistance from Amin Haddoui and Alex Dagg.
