State Street Global Advisors is closely watching events and markets as we seek to guide our clients through the investment challenges presented by the Russia-Ukraine crisis. In this commentary, we’ll provide our current views in response to some of the most urgent questions we’ve received related to environmental, social, and governance (ESG) issues.
Conflicts of this nature typically have devastating effects from a social (“S”) perspective and well as from a governance (“G”) perspective. How have ESG assessments changed regarding Russia at the country level?
Several specialized ESG research houses have massively downgraded Russia from a general ESG perspective (some to the lowest possible rating) and assigned the most severe classification from an ESG governance perspective to the Russian state. Additionally, we have seen a general ESG downgrade being applied to all companies in the MSCI Russia IMI index, as well as to companies domiciled in Russia.
How do the consequences of war (e.g., human rights violations) impact exclusionary screening?
Any exclusion decisions in the context of the Russia-Ukraine crisis need to be viewed in connection with sanctions being applied. To do otherwise would be unethical; we can’t discriminate against any region. That said, State Street has suspended the purchase of Russian securities in all portfolios for the foreseeable future.
Additionally, we do have exclusionary policies in place for many of our mandates and products that are driven by ESG research parameters – like potentials violations of societal norms or the exclusion of certain business activities. This type of exclusion is regionally agnostic.
What economic or financial consequences will social and governance assessments have on companies in Russia or abroad?
Today, it is hard to foresee the exact consequences, but current sanctions and the fact that, as mentioned, Russia is expected to be excluded from many policy benchmarks, will make the region de facto uninvestable – which will have dire consequences for Russian companies when viewed from the perspective of international investors. It will also be interesting to see if Russia exposure could become a factor in the future computation of ESG scores, but it is too early to know at this point.
Russia is a large oil and gas exporter. Regarding the environmental (“E”) component of ESG and the global climate change challenge, how will the invasion of Ukraine and resulting sanctions affect the energy sector?
We believe that the acceptance rate of nuclear and natural gas as long-term bridge fuels is a lasting outcome of the conflict. This outlook is driven by economics and energy security considerations, rather than by any specific decision to change the EU energy taxonomy. Regulatory softening with regard to decarbonisation timelines is also a potential follow-on effect.
That said, decarbonisation initiatives may ultimately be boosted due to the desire for more independence from fossil fuels. Remember: more than 90% of global GDP are net energy importers, and more than 90% of global emissions are now covered by net zero pledges. Those pledges will support the renewable energy space, so this crisis could lead to an acceleration of geopolitical tailwinds for renewables. In some ways, this could assuage worries regarding potential excess investment in, and potential oversupply of, renewables, which are critical to a net zero pathway.
The US shale sector could be a major and sustained winner from the crisis, especially in the context of the European liquified natural gas (LNG) shock. Similarly, the entire value chain around LNG (and non-Russian natural gas) is also likely to enjoy a boom phase.
The global energy market needs to be re-evaluated. Russian production growth had been weakening, but with sanctions in place the contraction will likely be much more pronounced (even accounting for potential Chinese investment). The conflict could further raise the price floor on global oil prices.
COVID-19 was a global shock event, and you argued in 2020 that the pandemic would be an accelerator for climate initiatives.1 Are there any similarities that can be seen coming from the Russia-Ukraine crisis?
I think the short-term focus will be on energy security, so it is only normal that people will default to legacy energy sources for that security. However, we think this will be a short-term phenomenon and that net energy importers, especially those who depend on Russian oil and gas, will accelerate their renewables programs to become more independent more quickly. This will trigger a strong focus on, and further accelerated investment in, renewables.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
The views expressed are of State Street Global Advisors as of 1 March 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.
There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
For EMEA Distribution: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).
There are risks associated with investing in Real Assets and the Real Assets sector, including real estate, precious metals and natural resources. Investments can be significantly affected by events relating to these industries.
Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in commodities entail significant risk and is not appropriate for all investors. Commodities investing entail significant risk as commodity prices can be extremely volatile due to wide range of factors. A few such factors include overall market movements, real or perceived inflationary trends, commodity index volatility, international, economic and political changes, change in interest and currency exchange rates.
Illiquid risk/Asset investments may have difficulty in liquidating an investment position without taking a significant discount from current market value, which can be a significant problem with certain lightly traded securities.
Singapore: State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). T: +65 6826-7555. F: +65 6826-7501.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security/ investment product. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street Global Advisors Singapore Limited shall have no liability for decisions based on such information.
Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
Past performance is not necessarily indicative of the future performance. Investment return and principal value will fluctuate, so you may have a gain or loss when investments are sold. Current performance may be higher or lower than that quoted.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.