Investors warned of twin crises stemming from Russian aggression, but potential for longer-term environmental upside.
Russia’s invasion of Ukraine is increasing policymakers’ short-term focus on energy and food security, especially in Europe, but price shocks and supply disruption could eventually lead to greater sustainability and resilience in both sectors, supporting environmental objectives.
Investors should be wary of immediate policy responses to price rises and shortages, notably increased use of liquefied natural gas (LNG), but there is strong potential for security-driven actions to dovetail with policy efforts to tackle climate and biodiversity risks over the longer term, according to speakers at a webinar hosted by the EIRIS Conflict Risk Network on the investor implications of the Ukraine conflict.
Euan Graham, Senior Researcher on Clean Energy at environmental think-tank E3G, said Russia’s aggression would accelerate Europe’s renewable energy transition, as heightened security concerns reinforce climate-related policy drivers, but he warned of the risks and costs of switching to other sources of gas in the interim.
Graham said the shock to the world’s energy markets was more significant and far-reaching than the steep oil price rises caused by an Arab oil embargo in the early 1970s.
“A crucial difference is it’s happening across multiple energy flows. It’s not just oil, it’s gas, electricity and coal as well,” he said, adding that Russia is the world’s sixth largest coal exporter. “Europe is really at the epicentre of this disruption”, effectively financing Russia’s war efforts through its energy imports, said Graham. Energy price rises were also impacting countries across the ‘global south’, he added, many of which were still recovering from the economic impacts of the pandemic.
The EU yesterday announced its intention to end Russian oil imports in the next six months, but the bloc still faces internal disagreement over a short-term gas embargo due to high levels of dependence in certain member states. The UK and US have already banned Russian oil imports. Graham said the European oil import ban would hurt Russia as it brought in higher revenues than its gas exports.
Graham said the European Commission’s REPowerEU plan, launched in March in response to Russia’s invasion of Ukraine, was “really ambitious”, noting its long-term focus on accelerating the deployment of renewables and the rollout of heat pumps and energy efficiency installations.
While the EU plan involved a short-term boost to gas demand, the overall impact on related assets would be negative due partly to increased perceptions of gas dependency as a national security risk.
“With Russia out of the picture as a cheap supplier, gas has really lost its value as a transition fuel and decarbonising gas-dependent sectors has become the priority, not only for boosting security, but also ensuring the competitiveness of European industry,” he said.
Depending on increasingly expensive LNG will make goods and services less competitive, both for European and other countries, making reliance on gas “a significant risk to economic development”, he added.
Graham criticised the wider policy response of the ‘global north’ as being insufficiently focused on demand management, noting the potential risks to international relationships.
“We’ve seen countries like the UK and the US effectively subsidising the cost of fossil fuels for citizens in their countries. But this does nothing to actually reduce demand, which is what we need on the global level to restore some kind of stability to energy markets,” he said.
An energy strategy unveiled recently by the UK contained no new plans to reduce energy demand, but more detail may be provided when an energy bill is presented in next week’s Queen’s Speech, laying out the UK government’s legislative programme for the next parliament.
Energy price volatility is likely to be accompanied by an extensive period of food price rises, intensified by Russia’s invasion of Ukraine, adding both to inflation risks and concerns over the sustainability of existing global food and agriculture systems.
The UN Food and Agriculture Organisation’s Food Price Index reached a record high in March in both nominal and real terms, with its vegetable oils, cereals and meat sub-indices all reaching all-time highs, while those for sugar and dairy products “also rose significantly”.
Speaking at the same event, Olivia Watson, Senior Analyst at asset manager Columbia Threadneedle, said there was “a strong possibility” of multi-year food price inflation, with potential for “a vicious cycle” driving prices higher as increased input costs lead farmers to cut back on use of fertiliser and other inputs, which could further reduce yields.
Existing post-pandemic strains on global food supply chains were being exacerbated by disruption of grain, vegetable oil and other exports from Ukraine, she said, as well as sanctions-related interruptions to fertiliser supplies from Russia, which contributes around 25% of global exports. As the conflict enters a new attritional phase, there are increased concerns of severe and long-term impacts on grain production in Ukraine, which previously supplied around a third of global wheat exports.
“All of this is creating a very serious situation and in some emerging markets input costs are around two to three times what they were a year ago,” said Watson, pointing to the potential for a “big humanitarian crisis” in emerging markets countries highly dependent on imports. She also noting the potential for problems caused by food price inflation in developed markets.
Watson said the agriculture policy response in Europe was similar to energy, with sustainability considerations being tempered in the short term. In particular, some agricultural land due to be set aside for conservation and biodiversity reasons under the EU’s ‘Farm to Fork’ policy is likely to be used for food production, while targets on reduction of fertiliser and pesticide use are being relaxed.
However, Watson said the looming food price crisis could be expected to accelerate transition to agricultural practices and policies with less negative impacts on climate and biodiversity, including renewed efforts to reduce waste, migration to plant-based foods and more efficient techniques for producing animal feed.
“In the medium term, there’ll be more discussion around the synergies between efficiency and food production, and food security and sustainability,” said Watson, citing possible policy support for alternative fertilisers, such as use of green hydrogen generated from electrolysers to produce green ammonia.
In the shorter term, Watson said investors could help to offset risks of a humanitarian crisis caused by food price inflation by engaging with investee firms.
“For the larger food companies that have exposure in the emerging markets most affected by this, there is a role to engage to understand their product strategy and how they are supporting consumers to adjust to the more challenging conditions that we can see coming,” she said.
“Equally for developed markets, investors can engage with food retailers to understand how they’re responding to inflation,” said Watson, noting the need for firms to incorporate higher prices into their product offerings in a way that maintains accessibility to a wide range of consumers.