
How to ensure you're investing ethically, in light of the Russian invasion
Can you be a responsible investor and still hold Russian government bonds or Russian companies?

One question grew louder among professional investors last week – can you claim to be a responsible investor and still hold Russian government bonds or Russian companies? Judging by the global fund manager scramble, including local KiwiSaver managers, the answer is probably ‘no, you can’t be a responsible investor with exposure in Russia.’
But what about a month ago, were you a responsible investor if you held Russian stocks and bonds before the invasion?
Responsible investing, sustainable investing and ethical investing are held out as helping create a better world and promoting better environmental and social outcomes.
Yet Morningstar estimates that, immediately before the invasion of Ukraine, 14 per cent of funds globally claiming to be sustainable or invest with environmental, social and governance (ESG) considerations were invested in Russia.
Holdings included Russian energy giants Gazprom and Rosneft, and Sberbank, the country’s largest lender. Some held Russian government bonds which directly fund the autocratic regime.
A key question is whether responsible or sustainable investors should focus only on the company they invest in, or also more broadly at the country it’s based in?
There’s no right answer, but in my view, ethical investing is much more than just looking at direct corporate inputs and risks. This means a responsible or ethical investor should not just be assessing a company in isolation, but also reviewing the system it operates in.
Russia doesn’t have a fair, transparent and democratic governance structure, and human rights can be trampled on. The rule of law can be ignored in the same way that the stroke of a pen can strip technology companies of value in China.
In a communication to clients last week, one KiwiSaver manager said that because of Russia’s invasion, they will sell their Russian securities. The invasion is the trigger making this issue public, but many investors probably didn’t expect they were invested in Russia in the first place. Their manager has let these people down with “responsibility-washing”.
Don’t take it from me, take it from Paul Clements-Hunt, the founder of Blended Capital and part of the group that framed environmental, social and governance investing, coining the term ‘ESG’. He’s clear that “ESG investors have failed” by having holdings in Russia.
Supporters of responsible investing argue that ESG is simply a screening tool to analyse environmental, social and governance factors of companies. It is not there to overlay an ethical framework. They may believe that, but arguably they’ve encouraged investors worldwide to believe otherwise.
Morningstar’s global head of sustainability research, Hortense Bioy, voiced before the Ukraine invasion that “some [fund managers] are more credible than others” around their investing being positive for our planet. She referred to potential for “empty promises” and Morningstar stripped 1,200 funds globally of ‘ESG’ recognition.
The words ‘ethically conscious’ and ‘Russian government bonds’ shouldn’t appear together. Yet Vanguard’s Ethically Conscious Global Index Bond Fund, used by at least one KiwiSaver provider, includes Russian government bonds.
Blackrock manages the world’s largest ESG-focused exchange traded fund, which includes weapons investments like Raytheon and fossil fuel companies like Exxon Mobil. These sound like holdings from a fund not claiming any special ‘responsible’ characteristics. How does this happen?
Regulators worldwide, including the Financial Markets Authority in New Zealand, have been increasing demands for fund manager accountability. They’re right to do so. If investors are sold a fund that’s described as sustainable, responsible or ethical then the fund must match its label.
Now’s the perfect time to ask your fund provider to explain the true depth of their responsible or ESG investment commitment.
This commentary is general information only – it’s always a good idea to seek professional financial advice for your personal circumstances. Disclosure - Pathfinder KiwiSaver does not invest in weapons manufacturers, Russian companies or Russian government bonds.
-John Berry is co-founder and Chief Executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management.
Originally published in Stuff 9/3/2022
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