Top investors are questioning environmental, social and governance investment strategies as scrutiny of the label grows in the wake of Russia’s invasion of Ukraine.
Around 39 per cent of fund managers said they were now reconsidering their ESG approach in light of the war, with the inclusion of Russian firms and weapons manufacturers in supposed socially conscious investment strategies among the top reasons cited, according to a survey of global investors by consultancy BFinance.
Analysts at BFinance said there was a sense from investors that “more scrutiny” is needed into ESG policies going forward.
“The exposure to weapons manufacturers was mentioned by a significant number of investors in the survey,” Kathryn Saklatvala, head of investment content told City A.M..
“The second most cited area was fossil fuel exposure, with the third area looking at country exclusion and how exposed funds were to Russia.
“There have been some uncomfortable conversations between investors and fund managers over why they hadn’t chose to operate an exclusion or exit during Q4,” she added.
One UK firm polled said it was now “looking more closely” at firms with human rights violations, while a Dutch pension fund manager said they were now overhauling their investment approach by rethinking controversial weapons exclusion lists, increasing their scrutiny of state-owned firms and reviewing which states are blacklisted from investment.
The data comes amid renewed scrutiny of ESG strategies in light of the war after it was revealed that over $9.5bn of investments billed as socially conscious were tied up in Russia prior to the invasion.
A report by market analysis firm CIBC Capital Markets last month found that 0.2 per cent of ESG holdings globally held stakes in Russia’s big four Russian energy companies, Lukoil, Novatek, Gazprom and Rosneft.
Tom McGillycuddy, founder of investment platform CIRCA5000 which pushes for investors to abandon the ESG label, told City A.M. it had become a “box ticking exercise”.
“The war in Ukraine has exposed a flaw in the global investment industry that some have warned about for some time,” he said.
“It ultimately has nothing to do with true impact investing, and the major global players that are listed as ESG leaders are far removed from ethically and socially conscious investing and policies. It’s only right we’re seeing renewed scrutiny of ESG strategies in light of the war, and it’s important we start calling out organisations for false ESG credentials.”
Top analysts have now been calling for an overhaul and standardisation of the way that ESG products are labelled to hold firms to account on where cash is being invested.
Investment bank UBS said the lack of clear definition involved in ESG investing was heightening risk in the space.
“The immediate risk […] arises from a lack of definition in the field, reflected in the many names and acronyms in use by practitioners: sustainability; responsible investment (RI); socially responsible investment (SRI); ESG (environmental, social and governance) investment,” analysts said in a note to investors last week.
Independent bodies have been set up to try and police ESG standards in recent months, with the International Sustainability Standards Board established in the wake of Cop 26 to implement standards.
The group laid out its first set of proposed guidelines last week for consultation, in a bid to raise standards and drive transparency across investment.