The effects of the Russia-Ukraine war have been far-reaching and devastating. Conflicts of this nature typically have similarly devastating effects from a social (S) perspective as well as from a governance (G) perspective and ESG assessments of Russia at the country level, have shifted in parallel.
Already, several specialised ESG research houses have massively downgraded Russia from a general ESG perspective (some to the lowest possible rating) and assigned the most severe classification from an ESG governance perspective to the Russian state. Additionally, we have seen a general ESG downgrade being applied to all companies in the MSCI Russia IMI index, as well as to companies domiciled in Russia.
Now, investors must recalibrate their thinking about the impact of geopolitical events on global macroeconomics, and how these trends affect individual countries and companies and shape security selection. The ongoing conflict has put Russia firmly in the spotlight here, and a key point that has not gone unnoticed to the investor, is just how bad the long-term economic consequences will be for companies in Russia based on new social and governance assessments.
Today, it is hard to foresee the exact consequences, but current sanctions and the fact that Russia has been excluded from many policy benchmarks, will make the region de facto uninvestable, which will have dire consequences for Russian companies when viewed from the perspective of international investors. It will also be interesting to see if Russia exposure could become a factor in the future computation of ESG scores, but it is too early to know at this point. Generally speaking, regional exposure has never been a major factor when doing ESG assessments, as most ESG KPIs for corporates are industry specific but market agnostic.”
See also: – War in Europe: ESG’s role in a multi-crisis reality
Now to assess the environmental (E) component of ESG and the global climate change challenge. It is no big secret that Russia is a large oil and gas exporter, so, how will the invasion of Ukraine invasion and resulting sanctions affect the energy sector?
The acceptance rate of nuclear and natural gas as long-term bridge fuels is a lasting outcome of the conflict. This outlook is driven by economics and energy security considerations, rather than by any specific decision to change the EU energy taxonomy. Regulatory softening with regard to decarbonisation timelines is also a potential follow-on effect.
That said, decarbonisation initiatives may ultimately be boosted due to the desire for more independence from fossil fuels. Remember: more than 90% of global GDP are net energy importers, and more than 90% of global emissions are now covered by net-zero pledges. Those pledges will support the renewable energy space, so this crisis could lead to an acceleration of geopolitical tailwinds for renewables. In some ways, this could assuage worries regarding potential excess investment in, and potential oversupply of, renewables, which are critical to a net zero pathway.
The US shale sector could be a major and sustained winner from the crisis, especially in the context of the European liquified natural gas (LNG) shock. Similarly, the entire value chain around LNG (and non-Russian natural gas) is also likely to enjoy a boom phase.
The global energy market needs to be re-evaluated. Russian production growth had been weakening, but with sanctions in place the contraction will likely be much more pronounced (even accounting for potential Chinese investment). The conflict could further raise the price floor on global oil prices.
Covid-19 was a global shock event. In 2020, I argued that the pandemic would be an accelerator for climate initiatives. Are there any similarities that can be seen coming from the Russia-Ukraine crisis?
The short-term focus will be on energy security, so it is only normal that people will default to legacy energy sources for that security. However, I think this will be a short-term phenomenon and that net energy importers, especially those who depend on Russian oil and gas, will accelerate their renewables programs to become more independent more quickly. This will trigger a strong focus on, and further accelerated investment in, renewables
Above all, with no crystal ball at our disposal, it’s impossible to accurately forecast quite how Russia’s invasion of Ukraine, and the eventual outcome of the conflict, will change the world in which we live and invest.
Nevertheless, it is a crucial time to for investors to start harnessing the issues that will undoubtedly reshape the way we analyse countries and companies when building portfolios now and into the future.
