ESG funds held $8.3bn in Russian assets before the war

Fund managers with environmental, social and corporate governance (ESG) standards held at least $8.3 billion in Russian assets just before President Vladimir Putin unleashed a war against Ukraine.

The figure is based on an analysis by Bloomberg of approximately 4,800 ESG funds representing more than $2.3 trillion in total assets. Of those, around 300 were directly exposed to Russia, although the number could be higher.

After nearly two weeks of war, those assets are likely to have lost most of their value. Investment managers who did not enter Russia say ESG funds should never have been in the country in the first place.

Philippe Zaouati, CEO of Mirova, the $30bn sustainable investment unit affiliated with Natixis Investment Managers, said ESG fund managers need to focus on democracies and avoid autocracies.

“There is no responsible investment if there is no democracy“, said.

“We have always thought that ESG was based on having a sincere intention to use finance for something good; if it is not this, then it is a management technique or an investment style”, he said in an interview last week. “With the Ukraine crisis, we see very clearly that some ESG funds and managers have sincere intentions, and others simply apply a technique”.

The Bloomberg analysis also found that at least 13 of the ESG funds holding Russian assets were classified under so-called Article 9, which is a category within Europe’s Sustainable Finance Disclosure Regulation that denotes the highest level of sustainability. Another 137 funds were labeled Article 8, indicating to investors that “promote” ESG characteristics.

“Given the Russian war against Ukraine, it is deeply inappropriate that these funds contain Russian sovereign bonds or state-owned energy companies, which are directly financing the war.”, said Maria van der Heide, director of EU policy at the non-profit organization ShareAction.

big time

Now that sustainable investing is a $40 trillion industry that has been embraced by the world’s largest financial firms, it is being applied to virtually every investment market and product. Banks trade ESG derivatives, while asset managers track a wide range of indices from providers like MSCI Inc. that offer varying degrees of ESG alignment.

MSCI, which said last week it would remove Russian stocks from its emerging markets gauge, has more than $16 trillion in assets compared to its products overall. He said the move followed comments from market participants that “cannot be reversed” currently on the Russian stock market.

Many of the ESG funds that say they are now stuck in Putin’s Russia tracked such indices, largely because the supply of genuinely green or social assets has failed to keep up with the skyrocketing investment demand.

Bard Bringedal, chief investment officer at Storebrand Asset Management, said the “The nature of emerging markets is that there is a higher risk that there will be extraordinary aspects after the investment”. “This risk is in part inherent in the potential returns.”

Zaouati de Mirova said that Russia’s war against Ukraine shows that ESG funds can no longer afford to ignore the political context in which they are investing. He and others also argue that the same logic should apply to assets from China, which Mirova has blacklisted.

ESG investors who bought Russian assets are now being urged to take a stand. “This is the time to break ties and wait for regime change”, according to Johan Frijns, executive director of the non-profit organization BankTrack. “Everyone should do what they can, including bankers and investors.”