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Russian exodus is right, but engagement cannot be ignored

Stuart Clark, Quilter’s WealthSelect portfolio manager

Date: 06 April 2022

The Russian invasion of Ukraine is just over a month old now and the situation shows no sign of abating.

The humanitarian crisis that has unfolded in such a short space of time is unprecedented since the end of the second world war and is rightly the focus of the international community.

The Kremlin’s actions in Ukraine sparked a quick and vast exodus of international businesses from Russia as the country was heavily sanctioned by western nations and the world comes to terms with the destruction and damage that is being wreaked.

Asset managers and financial institutions withdrew what they could and put a pause on new investment. We ourselves have prevented the external investment managers of our mandates from initiating new positions in Russian and Belarussian investments and are engaging closely with them on what they plan to do with the existing holdings.

This extreme and fast response from the industry was the right call. The actions of Russia and the crisis that has ensued required a swift response and the exclusionary route for Russian assets was clearly the way forward.

How and when this war is resolved remains to be seen, and it could be a number of years before Russian assets are deemed acceptable again, both from an investment standpoint and an ethical one. In the short term there has been considerable erosion of capital in Russian assets as a result of the war. From this extreme position there will be an opportunity for some investors to make money and one must determine whether that sits comfortably with one’s views of the world but, ultimately, engagement will be key for asset managers should a resolution begin to emerge.

Going forward, it is this engagement that needs to remain front and centre of the investment world when addressing risks and driving positive change. Russia’s actions are an extreme case and should not result in exclusionary practices becoming the norm for things we may not agree with.

Environmental, social and governance investing can be a hugely impactful and have a lasting legacy on the world, so long as positive change is being sought out. Part of this is things such as the transition to net zero or providing food and water security to billions of the world’s populations who currently do not have this.

As asset managers we wield huge influence over companies and how they operate. Engaging with them and helping them on their journey in things such as energy transition or diversity initiatives will have much more of an impact than simply ignoring them and letting them continue to operate with fewer checks and balances. 

Making exclusionary policies the norm will not be as effective as engaging with companies and driving forward change. For example, we can all accept that fossil fuels are bad for the environment and are a significant driver of climate change and the issues it has introduced. It is understandable that for some investors with specialist requirements may not want a portfolio which contains big energy companies involved in the extraction of oil, gas and coal or indeed in other sectors that contribute significant carbon emissions through their operations.

However, there are asset managers and funds out there that hold these companies but are engaging with them, taking the approach that bringing these companies into the new world in a way that can drive improved value to the company and therefore the shareholders, despite their controversial activities, is more important than simply ignoring them and hoping they change as a result of a shift in attitudes.

One fund that does this is the Trium ESG Emissions Impact fund and can act as a real differentiator for an ESG portfolio. It is an equity market neutral fund and looks to bring about positive impact by engaging with companies in the most challenging high-emitting sectors to lower their carbon footprint. Crucially these are sectors that cannot be ignored if globally we are going to achieve the reduction in carbon emissions required.

Climate change is arguably the biggest environmental threat to the world in the present day and as such engagement is key to help battle it and reduce emissions. Likewise, as we have seen with Russia, we may be faced again with countries, companies or governments behaving in ways that we do not agree with and cause potential harm.

With all the current and potential challenges the world faces, we need to make sure engagement remains at the forefront to help introduce positive change.  Post Russia’s invasion of Ukraine, there will be an increased focus on the security of many things including energy supply and that should provide a tailwind to alternative sources of energy and the companies that provide the required assets to harness that energy. 

At the same time the higher cost of traditional energy sources provides increased cashflows for those companies to reinvest into projects that can help decarbonise the energy supply chain while also increasing the viability of future technologies such as green hydrogen. Exclusion could put these technologies into jeopardy.

The actions taken by the industry to reduce Russia exposures are appropriate and aligned with what investors would expect, but we must not allow engagement practices more widely to be diluted as a result.

Supporting you and your clients throughout the situation in Ukraine

Visit our dedicated site for all the information and support you need to help your clients feel confident about their investments throughout the unsettled situation with Ukraine.

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