A selection of this week’s major stories impacting ESG investors, in five easy pieces.
This week’s blog marks the first anniversary of Russia’s invasion of Ukraine by noting five of the changes it has wrought to sustainable investing.
Short-term pain, long-term gain – The energy crisis prompted by Putin forced a reassessment of the renewables transition. Coal enjoyed a resurgence in demand, North Sea drilling licences were granted, gas was endorsed as green, and oil majors enjoyed bumper profits. But solar and wind enjoyed record levels of generation and investment in 2022, with policy swinging behind accelerated renewables deployment in multiple markets, led by the US; energy security and efficiency were cited as often as climate change as reasons to end our toxic relationship with fossil fuels. Demand for gas may surge further in 2023, but its demise could well be sooner and sharper – and the risk of stranded assets much higher – than might have been predicted before Russia’s tanks rolled toward Kiev.
Hunger for reform – Food security joined energy security as a primary concern for policymakers and investors. Dire warnings of widespread starvation were not substantiated, due to a deal brokered by Turkey and UN Secretary General Antonio Guterres. But the impacts of Russia’s war on the price of farming inputs – feed, fertiliser and fuel – shone a spotlight on practices that were neither sustainable nor resilient. Like energy, food security is causing many short-term tensions, but also accelerating solutions, both global and local. In the Global South, soaring input costs – often combined with further manifestations of the physical risks of climate change – are pushing many back into poverty, hunger and migration, putting SDGs at risk. In the Global North, food shortages and panic buying marked a severe cost-of-living crisis. Some proposed solutions may seem unpalatable at first, but they speak to a need to reform the global food system, strike a new deal with nature, and to deploy innovation on the path to greater sustainability.
More diligence due – Russia’s invasion of Ukraine also proved that investors need to improve their due diligence processes, particularly in relation to human rights. Many were caught out, not realising the extent of the Russian operations of investee companies, nor helped by the lack of information from the latter, which continues today, in terms of their response to Russia’s mobilisation law. While no investor seeks to punish ordinary Russians through knee-jerk, disorderly withdrawals, nor do any wish to be complicit in human rights abuses in a conflict zone, as a result of “remainers” putting profits first 12 months on. As above, the crisis has prompted a policy response, with an increase in mandatory human rights due diligence, including in Europe, an emerging body of international jurisprudence and, most recently, a review of the OECD’s human rights guidance to multinationals.
Governments and governance – Rethinking Russian exposures will have wider implications, as investors consider the cost of ignoring links to autocracy, military aggression and corruption in their portfolios. China is likely to avoid secondary sanctions with its position paper on the conflict issued today, but military aid to Russia, or the further aggression toward Taiwan, may force foreign businesses and investors to reassess. Similarly, understanding and mitigating governance risks will be essential to any asset owner looking to invest widely in climate- and nature-positive solutions across EMDEs. This work is already getting under way via investor initiatives in the sovereign debt space.
Weaponising ESG – Alongside the UN General Assembly’s condemnation this week of Russia’s invasion, the Group of Seven will consider further military spending to support Ukraine. Increased defence spending is hard for governments already dealing with polycrises, but the demand for military hardware has also raised questions over arms-related exclusions in sustainable investment strategies. Europe’s social taxonomy may have been kicked into the long grass, but the ‘do no significant harm’ remains in the environmental taxonomy’s minimum safeguards. A number of investors have outlined a defence of existing exclusions, and it remains to be seen whether these policies are restricting investment flows to weapons manufacturers.