Russia-Ukraine conflict: what impact will it have on ESG investments?
The current conflict will have various impacts on ESG investments over time.
In the short term, this impact is negative: as is the case for other asset classes, inflows into ESG funds have decreased in favour of the most liquid and safest investments; long-term climate-aligned investments are being jeopardised by short-term investments in carbon-intensive energy production (the extraction of shale is again on the agenda, Biden's $500 billion subsidy to accelerate decarbonisation has been suspended due to the conflict, coal is being revived in many regions, etc.). Calls for ESG regulations to be put on hold are growing, in favour of making energy security the top priority.
In the medium to long term, however, the crisis will stimulate ESG investing:
On the environmental front, the crisis is a clear call for energy independence, which will probably result in an acceleration of energy transition plans in many countries: energy efficiency plans and renewable energies on the one hand; probable increased support (or muted opposition) to nuclear energy on the other, while the debate on the inclusion of gas in the taxonomy will probably be renewed.
On the social front, the refugee crisis and the consequences of the war are likely to increase the need for social financing and the development of social funds. In addition, ESG investors previous avoidance of the defence industry has already been called into question by many observers; we have seen some interesting turnarounds of investors who have recently reincorporated this sector into their ESG funds, a few months after excluding it. Security will likely be classified as an essential human right by the sector.
In terms of governance, investors are likely to place greater emphasis on the political backdrop, which will place country risk at the forefront of ESG analysis: democracy and human rights, but also tax policies, such as the repression of the wealth of sanctioned individuals, will encourage more attention to be paid to certain financial jurisdictions. This will likely lead to a change in ESG rating methodologies, especially for sovereigns. Stronger sovereign exclusions in ESG funds on governance are again on the agenda.
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