Investors wanting to use their money for good – and a growing number profess to – face more difficult challenges since Russia invaded Ukraine.
The first are environmental. As energy prices soar and many thousands of consumers struggle to choose between fuel and food, some investors may be reviewing their position on fossil fuels.
If we are to reverse global warming, we need to move away from historic sources of power and quickly. The war has highlighted the need to accelerate the transition to a low carbon world, as well as the scale of Europe’s dependency on Russian gas.
But this transition cannot be made overnight. Take Germany, for example. Fairly swiftly, policy there has moved away from establishing the Nord Stream 2 gas pipeline towards building terminals in the north of Germany that can enable the importation of liquefied natural gas (LNG) from the Gulf. Such terminals take at least four years to build. A move to increase the UK’s nuclear power capacity will take even longer.
It is becoming clear that our need for an urgent transition to low-carbon energy will have to be tempered by the practicalities and timetables of implementing the new energy framework. A range of transition arrangements might be necessary between now and 2050, and even beyond this.
In this country, renewables and nuclear may be able to produce the amount of power needed, but not necessarily at all the points it is needed or in every year.
Figures out this week show that wind generation in the UK was down 30% in the third quarter of 2021 compared with the same period the previous year as wind speeds dropped to their lowest level this century.
Our demands on the grid vary depending on the time of day or year yet we expect power always to be there and at the flick of a switch. This may not necessarily coincide with when the wind blows or the sun shines.
There are various energy storage systems that could help overcome this issue, such as battery stacks, but the capacity in this country (and elsewhere) is a fraction of what will be needed if we are to rely on renewables for the bulk of our energy.
To fill the gaps while we build the necessary infrastructure, and to cover short-term spikes in demand, it is surely less damaging to use gas stations than to restart coal plants.
Does that mean investing in gas? We have always avoided fossil fuels on principle, but we understand the arguments of sustainable investors who may have changed their minds about companies like Shell and BP.
To this environmental dilemma has been added the ethical question of investing in companies with business interests in Russia.
I have written often on the oddities of environmental, social and governance (ESG) ranking systems. Germany’s main electricity company, RWE, scores very highly (an A score) on these ratings from the MSCI organisation.
Last year it produced 32 GWh of power from renewables, 52 GWh from gas and 53 GWh from coal stations. It has said that it will continue to buy Russian gas under existing contracts, despite the invasion.
Maybe it cannot keep the lights on without Russia’s help; maybe it does not care very much that its payments help the Russian war effort. Would investors in a sustainable investment fund be surprised to see RWE included and does the MSCI rating reflect their concerns?
RWE’s position is an awkward one resulting from unwise energy security plans by the German government. Car makers also find themselves in a difficult place. Putin has threatened to take the assets of manufacturers who close their plants as a result of the war. Mercedes says it has €2.2bn of assets that could be expropriated.
It was only in April 2019 that it opened its plant, costing nearly $300m, near Moscow (with Putin in attendance). Nevertheless it has halted production there and suspended exports to the country. Renault, which produces 20% of its output in Russia, has also ceased production, after coming under intense pressure to do so.
Nestlé has stopped supplying KitKat chocolate bars and Nespresso coffee capsules, but it is still selling “essentials” to Russia. It has come under bitter attack from the Ukrainian Prime Minister Denys Shmyhal, who has accused it of aiding the killing of “defenceless children and mothers”.
This matters. It matters to many investors and customers, which is why the company is having to fight a #BoycottNestle campaign on Twitter from those who argue it has not gone far enough. It matters to employees too.
There will be talented staff who leave or opt not to work at companies they perceive to have been on the wrong side of this issue. And that ultimately harms a brand and the prospects of a company.
For this reason, our team has now begun writing to every single company we own asking what their response has been to the Russian invasion and whether they are still doing business in Russia. If so, we will give them opportunity to explain their rationale for not stopping and factor this into our future investment decisions.
Political risk
Finally, we come to what you may call the G in ESG – governance. At times like this, political risk is heightened. Even before this war we were not invested in Russian companies because of the political risk of having our assets pinched by an oligarch and not trusting the courts to help us.
Rising commodity prices may help some countries, but they hurt others, like those that are net importers of wheat, for example. This can lead to political instability.
Wheat prices have risen sharply. They did so in 2010, following severe meteorological problems in Russia, Ukraine and elsewhere. The Arab Spring followed. The rising cost of food may have been just one factor at play, but academics say it was significant.
We have reduced our exposure to emerging markets to under 7.5% (they represent 12% of the MSCI All Countries World Index) and focused on companies such as South Korea’s Samsung and Taiwan’s semiconductor giant TSMC in more developed countries.
We take the view that this is the time to reduce risk in your portfolio – and at the moment that means ESG risk in particular.
Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and the Artemis Global Select fund. The views expressed above are his own and should not be taken as investment