Commentary

ICYMI, Putin Puts Governance Back on the Agenda

Events in Ukraine gave sustainability-minded investors pause for thought.

Russia’s invasion of Ukraine is a momentous and appalling human tragedy for its citizens which will have painful consequences beyond its borders. It also feels like an echo from history, both in its justification and its execution. Further, it can be seen as stemming from a series of governance failures, and as having huge and unpredictable environmental and social implications.

Vladimir Putin has overseen a hydrocarbon-fuelled kleptocracy for more than two decades, eroding checks and balances on his power, while exploiting natural resources with the help of oligarchs and western firms. The latter have lent a willing hand, as have governments and financial regulators globally, especially in the London laundromat. The governance failures also extend to politicians who have been unwilling or unable to fill the void in our G-Zero world, resulting in an uneasy accommodation with autocracy and aggression.

This week’s market turmoil gives some indication of the longer-term implications for investors. Gold soared, as its digital replacement plummeted, while new energy and commodity price spikes stoked broader inflation and growth fears. Sectors dependent on discretionary spending suffered, but defensive investments will not be comfortable either. As with Covid-19, firms that demonstrate adaptability and resilience may be best placed to handle the many uncertainties.

Banks and financial institutions, for example, will need to observe the complex and evolving web of new sanctions with more rigour than some have managed their compliance obligations in the past. Or indeed their commitments to decarbonising their business models: HSBC’s new targets were criticised earlier this week for excluding bond underwriting, an oversight shared with peers.

De-risking may have uneven consequences in energy and mining, with BP falling on its 20% Rosneft stake, as other exposed stocks looked on nervously. Prices of mining firms with Russian and Ukrainian interests also went in the opposite direction to metals prices, leaving scope to ponder the wisdom of Rio Tinto’s recent ‘wages of sin’ dividend, the second most generous in UK corporate history.

Gas providers are making hay while the sun still shines, but the long-term viability of joint ventures such as Shell’s with Gazprom may face further scrutiny as Nord Stream 2 is mothballed and new sanctions are considered. Further, the shortcomings of Europe’s renewable energy directive will be debated more urgently, as energy security concerns combine with net zero targets. So too will the UK’s government’s latest attempt to have its cake and eat it, with regard to North Sea drilling.

As some noted, legislative momentum on sustainability and climate was already slowing, just 100 days after COP26. Like Covid-19, the Ukrainian crisis will also claim media and policymaker attention. While Europeans bemoan the lack of teeth in new corporate sustainability due diligence rules, the US is still struggling with climate disclosure rules, let alone green fund labelling or even carbon pricing.

Rumours of a delay to the COP15 biodiversity summit in China were rife even before Putin gave his orders, pushing back coordinated action against deforestation, food chain risks and other efforts to protect natural capital. While all our thoughts are with Ukraine, many will be hoping for some renewed focus on global sustainability next week, with the release of Working Group II’s contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.

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