After months of increasing tensions and the well-publicised military build-up on the Ukrainian border, Russia launched its invasion of Ukraine. This caught many European leaders by surprise and has had an immediate and pronounced impact on financial markets reflecting the importance of Russia as a major oil and gas exporting nation and Ukraine as a major food producer. The most immediate impact has been on energy prices with UK petrol spiking at almost £1.80 per litre and gas and heating oil prices more than doubling since the start of the year. The medium to long-term financial effects are harder to predict, but given the importance of energy and food prices on inflation, it is likely to further increase the inflation we are already experiencing as the global economy recovers from the pandemic.
Whilst the economic impacts are challenging, the humanitarian impact of the war becomes more and more distressing. We understand that for many of our clients – it is ethics and not finances that are the immediate concern. So, whilst having nothing against ordinary Russian people, the concern is that – right now – any investments in Russia are potentially supporting the Putin regime.
We’ve been consulting with the investment fund managers – of the major ethical funds – to assess the situation and to help answer the question of “Am I investing in Russia?”. It helps to distinguish ‘direct’ versus ‘indirect’ investment.
None of the ethical funds we have spoken to have direct investments in Russia. In other words, they do not hold shares in any Russian companies. This is the historic position, for a number of reasons – concerns about oppressive regimes, concerns about company governance, and the fact that many of the larger Russian companies engage in activities avoided by ethical funds – such as fossil fuels and mining. It’s also worth noting that ethical funds will also screen-out investments in armaments, on either side of the conflict.
With indirect investments, the picture is more complex. Although the scale is small, there are a number of ways in which ethical funds could be invested in companies with connections to Russia:
- Non-Russian companies operating in Russia.
- Non-Russian companies with holdings in Russian companies.
- Non-Russian companies whose products or services are being used in Russia.
In general, company engagement is a huge part of what ethical funds do and – in the case of indirect Russian investments – the fund managers are contacting the relevant companies to understand what actions they are taking – and decide on their next steps. Obviously not every company operating in Russia condones the actions of the Putin regime (and clearly nor does every Russian). Some of these companies are doing environmental and social good – but they are contributing to the Russian economy. As such, we anticipate that ethical funds’ indirect exposure to Russia will reduce even further. The situation is obviously fluid, and we will continue to liaise with the fund managers on our clients’ behalf.
We hope this short summary is helpful is explaining some of the general issues. If you have any particular questions – please feel free to contact us.