Nearly three months after Russia’s invasion of Ukraine, the human tragedy—and the very pressing geopolitical concerns—of this war continue to dominate the news cycle. Heartbreaking images of the dead in Bucha, Mariupol, Irpin, Kharkiv and other Ukrainian cities, as well as images of fleeing Ukrainian refugees, are now seared into our collective memory. So are the videos of heroic Ukrainian resistance, and extremely courageous antiwar protests by Russian civilians.
The mass solidarity with Ukraine across the U.S. and other Western countries has been impressive. So has the speed with which global financial and diplomatic institutions have moved to isolate and punish Russian President Vladimir Putin and those in his inner circle. Many investors are also eager to play a role in helping end Russia’s war against Ukraine.
We live in a time when sustainable investing has gone mainstream, so the avenues to mobilize investment dollars around a social concern have certainly multiplied. And there are some obvious ways that investors can help exert pressure on the Russian government. One method is to divest from, or stop purchasing shares of, Russian companies, which mostly is already mandated by sanctions. But in fairness, Russian exposures within the mainstream indexes tend to be fairly low to begin with. For example, in investment portfolios managed on the Envestnet Inc. platform, the average allocation to Russian securities—before the Feb. 24 beginning of Russia’s campaign against Ukraine—was less than 1%.
Another easy solution for investors to demonstrate solidarity with Ukraine is to engage with multinational companies that do business in Russia. Here again, many of these companies, even those loathe to take action in 2014 following the Russian annexation of Crimea, have acted decisively this time around to close or downsize their Russian operations.
However, there are legitimate arguments that the majority of the Russian people are not responsible for this humanitarian and geopolitical crisis—and the impact of diplomatic and financial measures are complex, and aren’t easy to measure for impact in the short term. To make an immediate impact, the West, and individual investors, can focus on Russian revenue from the production of fossil fuels.
The Russian economy, and funding for the war against Ukraine, heavily depend on oil and gas revenue. But, there are weighty considerations to keep in mind. Environmental, social, and governance (ESG) concerns do not necessarily guarantee corporate sustainability and profitability. For example, companies that produce electric cars, or create less invasive mining or drilling techniques, are not necessarily well-managed and governed. Furthermore, many renewable fuel sources and technologies are currently much more expensive than their traditional counterparts, and transitioning to them very quickly can be burdensome (and risky) for smaller or poorer people and economies.
Putin is aware that he holds significant leverage over European countries, including Germany, due to their dependence on Russian oil and gas. This is ironic, given that Europe has consistently been far ahead of the U.S. on clean energy regulations. However, as the war has continued, Europe and the U.S. have both sought to wean themselves off Russian fuel. The U.S. eventually included oil in its sanctions on Russia, and the European Union is attempting to enact energy sanctions against Russia, which would be painful for many of its members.
Viable ESG Investments
Financial advisors have an opportunity to work with investors to identify well-governed, ESG-classified exchange-traded funds (ETFs) that invest in companies dedicated to developing the technology and tools necessary for transitioning to a future low-carbon world—something which would reduce American and Western dependence on Putin’s Russia and other regimes with poor human rights records.
Examples of ESG investment vehicles that are strategically focused on enabling conditions for net zero can include those that track and invest in companies:
• Vital to the supply chain of renewable energy, and the transition to lower to no carbon.
• Offering products and services related to geothermal, hydro, solar, wind, and other forms of renewable energy.
• Developing and building water infrastructure which fosters more sustainable water use.