Using a Scalpel not a Sledgehammer: The Investor Response to the Russian War in Ukraine


As another needless war unfolds, it’s important to consider how investors have enabled Putin over the years and the lessons to be learned from burying one’s head in the sand. His invasion of Georgia in 2008 and then of Crimea in 2014 should have been early warning signs for asset owners and managers. Yet many responded with yawns and shrugs over the years, prioritizing profit over values by choosing to stay invested.

I understand this more than most, as an ex-Russian equity analyst who saw up close the potential for making gobs of money by investing in Russian-owned businesses. On Feb. 24, when Putin invaded Ukraine again, those that remained invested had no excuse. The horrific impacts of Russia’s invasion of Ukraine should be a wake-up call for anyone invested in countries with authoritarian regimes. It will be interesting to see how funds that purport to “integrate ESG factors” into their investment process yet remained invested in Russian state-owned enterprises —such as Sberbank, Rosneft, and Gazprom— justify enabling a kleptocratic government. In instances like this, when both the moral and financial cases lead to the same conclusion, you’d think that there would be a simple answer of exclusion. But despite what many of their clients may assume, many ESG funds avoid using “values” in their investment approach by design. Perhaps, this war will force them to see that when it comes to authoritarian regimes, the rule of law does not exist in a conventional way. Investors can become targets just as easily as dissidents. Where do we go from here?

By request of the Ukrainian government, the investor community should be doing all it can to isolate the Russian economy and financial system. Divesting (if that’s even still possible) following sanctions or removal from indices is not nearly enough. Blindly following sanctions lists or ESG rating agencies is not true ESG integration. Take MSCI downgrading Russian and Belarus government ratings to the second lowest rating for example. What could a country possibly do to get a lower rating? And if you take ESG ratings at face value, Gazprom, a key funder of this war, looks acceptable. Yet, the company profits flow straight to funding this invasion of an innocent country. Clearly, the rating agencies aren’t asking the right questions. They, and ESG investors by extension, have been much more concerned about ESG risks to companies rather than what ESG risks come from companies. While knee jerk reactions, such as relying on uninformed exclusionary lists, can make investors feel better in the short-term, such impulses are typically ignorant, ineffective, and can have unintended consequences. Instead, investors must take a hard look at the companies in their portfolios and understand their role in enabling the human rights atrocities in Ukraine through their products and services. This requires thoroughly researching and evaluating Russian supply chains and relationships. By isolating companies that contribute natural resources, misinformation, military or surveillance equipment, and funding to Putin’s physical and cyberwar machine, investors can provide strong support to Ukraine.

There also needs to be engagement with multinational companies operating in Russia that don’t have obvious ties to the Russian state. What practices have multinationals put in place to address the heightened risks of doing business in an authoritarian state? What are multinationals doing to ensure that their operations do not inadvertently enable human rights atrocities? Investors can no longer tolerate generic human rights policies. Instead, investors need to press for concrete examples of what multinationals in Russia are doing on the ground to fortify the opposition. It may be too little too late, as Putin will likely take control over foreign assets in Russia, therefore stripping multinationals of any modicum of influence. Nonetheless, active opposition looks very different from complicity and should be the standard for multinationals operating in authoritarian states. Western companies in Russia that turned a blind eye to Putin’s deranged narcissistic obsession with the Russian Empire have a decision to make. They can pull out and do what they can to help their employees on the ground. They can keep working in Russia and support the opposition. Or they can ignore the social impact of their actions altogether by continuing business as usual, using the excuse that business and politics shouldn’t mix. I want to remind those choosing the latter course that no one is safe from risk in an authoritarian regime. Investors can help tip the scale, either by fueling corporate greed or by leveraging their influence to push for corporate responsibility.

The best outcome for Ukraine at this point is a swift end to the war brought on by a Russian coup. In the meantime, investors are responsible for helping create an environment in which an overthrow of the current Russian regime is the only viable option for the Russian military and/or populace. The impact of actions taken by companies and investors extends beyond Ukraine. For China, this is a dress rehearsal—a test of whether western companies are brave enough to stand up to authoritarianism and whether investors have the will to forgo profits.

~ Sonia Kowal ~