Analysis: Russian risk recalibration is a wake-up call for investors

  • ESG-focused funds totaled $35 trillion in 2020
  • Crimea responds to ‘big mistake’ for ESG-PFA funds
  • Attention begins to turn to investment in China

LONDON, March 10 (Reuters) – For funds undeterred in their investment choices by the murder of Saudi journalist Jamal Khashoggi or China’s treatment of Uyghurs, Russia’s invasion of Ukraine is an alarm signal.

Buying companies based on environmental, social and governance (ESG) factors is one of the hottest trends in the fund management industry, attracting investments totaling over $35 trillion by early 2020.

But for fund managers from Boston to London, the focus has largely been on businesses, with governance risk largely ignored in decisions about whether to invest in a country itself.

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China has denied allegations of abuse against Uyghurs in southern Xinjiang. The Saudi government said Khashoggi’s murder was carried out by a rogue group.

Now, as Western banks and firms re-examine hundreds of billions of dollars of exposure to Russia, more than half a dozen fund managers polled by Reuters said the Ukraine crisis is forcing them to rethink their allocation of country risk.

“We have to accept that we as an industry made a very big mistake by not taking this (Crimea) invasion in 2014 for what it was and acting on it,” said Sasja Beslik, sustainability manager at the $87 billion Danish investor. FAP.

“Is this something we would like to repeat?” Beslik spoke of investors holding Russian assets that have often struggled since its invasion of Ukraine, which Moscow describes as a “special operation” to disarm the country.

Although a fund may make its own assessment of the quality and structure of a country’s government, this is only one factor in investment decisions.

For about 71% of the $35 trillion invested with an ESG lens, the analysis focuses on an investment’s risk, rather than a country’s human rights record or other risk factors. governance.

It may be easier to ignore human rights if an ESG fund manager believes that the odds of losing money on an asset, such as a sovereign bond, are low enough given its price, because , for example, the ruling government of the country concerned is safe.

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, said that for investment decisions on China, at least Western investors focus more on shareholder value than human rights.

However, sovereign risk engagement is the next frontier for investors, said Martina Macpherson, president of the Network for Sustainable Financial Markets, a nonprofit led by financial experts and academics.

This is particularly the case “where systemic ESG risks such as climate, biodiversity, human rights abuses and poor state governance are concerned,” Macpherson added.

Government crackdowns can sometimes be followed by additional investment in the country concerned as disruptions to daily economic activity cease, as seen after China ended pro-democracy protests in Hong Kong it two years ago.

Foreign direct investment in China increased by 14.9% in 2021.

Beijing rarely discusses the issue of democracy, but has previously referred to China’s governance arrangements as “integral people’s democracy”. Read more


Bets on such market movements have not always been safe.

International investors, for example, were criticized last year for holding bonds issued by Belarus when its President Alexander Lukashenko stepped up a crackdown on protesters.

And investors in a range of Chinese companies, from tech to property developers, suffered losses as Beijing unleashed a regulatory crackdown last year. Read more

While some funds have abandoned investments in these countries, citing reputational and moral concerns as well as the risk of loss, these have tended to be smaller or those with a mandate to invest in a sustainable outcome.

Most stayed, partly because the task of exiting becomes more difficult as the market gets bigger.

The BlackRock iShares ESG Aware MSCI EM ETF (ESGE.O), for example, has about 3% invested in Russia, but 28% in China, according to Refinitiv data.

“It’s too big to ignore and it’s too profitable,” Lardy said of investors’ holdings in China.

That view is shared by Ross Gerber, president of Gerber Kawasaki Wealth and Investment Management, who said China’s enormous global economic reach makes it difficult for any investor to avoid.

“There’s no getting around China,” said Gerber, who owns shares in Tesla, for example, with a major factory in Shanghai.

“People criticize me for having investments in China and not in Russia, but it’s very nuanced, people who criticize are typing on an iPhone made in China and wearing clothes made in China.”

Nevertheless, some are now moving money out of China.

Norway’s $1.3 trillion sovereign wealth fund said it had ruled out China’s Li Ning (2331.HK) because of an “unacceptable risk” the sportswear maker could contribute to serious human rights abuses. man in Xinjiang, China. Read more

Li Ning did not immediately respond to a request for comment Tuesday after Norges Bank’s announcement.


One of the main factors missing from ESG calculations is the market’s pricing of sovereign debt, said Diliana Deltcheva, head of emerging market debt at asset manager SRI Bond EM Fund, who has long ruled out the Russia, Belarus, China and Gulf States debt.

In the case of Russia, foreigners hold almost $80 billion in debt, including sovereign bonds denominated in roubles, euros and dollars, as well as hard currency corporate securities, while investors outside Russia held also 86% of the free float of the Russian stock market at the end of 2021.

In addition, Western companies, from BP and Societe Generale to Citigroup and Apple, have forged ties with Russia. Many have interrupted or terminated these connections since the invasion, steps some say show that ESG values ​​have now seeped from money management into corporate decision-making. Read more

“No rules will protect you,” Sonia Kowal, president of US ESG investor Zevin Asset Management, said of investing in certain countries. Kowal said she avoids investments in Russia and Chinese state-controlled companies.

Jeffrey Gitterman, an ESG-focused wealth manager in New Jersey, said he sold his firm’s 5% stake in emerging markets last week after the Russian invasion, among other fears that Chinese holdings also face restrictions.

“Everything we know about the role of emerging markets (EM) in portfolios is now subject to reassessment,” he added.

($1 = 6.8803 Danish kroner)

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Additional reporting by Sujata Rao; Editing by Paritosh Bansal and Alexander Smith

Our standards: The Thomson Reuters Trust Principles.

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