ESG corporate buying is one of the hottest trends in the money management industry, attracting investments totaling more than $35 trillion by the start of 2020.
But for money managers from Boston to London, the focus has mainly been on companies, with governance risks primarily ignored in decisions about investing in a country.
Now, with Western banks and companies reconsidering their hundreds of billions of dollars in exposure to Russia, more than six fund managers interviewed by Reuters said the Ukraine crisis had prompted them to rethink how they define risk.
“We have to accept that, as an industry, we made a huge mistake by not taking this (Crimea) invasion in 2014 for what it was and acting accordingly,” says Sasya Beslik, head of sustainability at the 87 billion Dollar Danish Pension Fund.
Nicholas Lardy of the Peterson Institute for International Economics explained that Western investors at least focus more on shareholder value than human rights for investment decisions in China.
Martina Macpherson, president of the Sustainable Financial Markets Network, a non-profit organization run by financial experts and academics, said sharing in sovereign risk is the next frontier for investors.
This is particularly the case, MacPherson added, “where it relates to systemic risks to environmental, social and institutional governance such as climate, biodiversity, human rights abuses, and state mismanagement.”
Government repression can sometimes follow an influx of more investment into the country in question as disruptions to daily economic activity cease, as seen after China halted pro-democracy protests in Hong Kong two years ago. Foreign direct investment in China increased by 14.9% in 2021.
International investors, for example, came under fire last year for holding Belarus-issued bonds when its president, Alexander Lukashenko, intensified his crackdown on protesters.
Investors in a range of Chinese companies, from technology to property developers, took losses as Beijing launched a regulatory crackdown last year.
Refinitiv data shows that, for example, the BlackRock Eyeshare fund has about 3% investments in Russia but 28% in China.
“It’s too big to ignore, and it’s very profitable,” Lardy said of investor property in China. Ross Gerber, president of Gerber Kawasaki Wealth Management and Investment, echoed the same view. He said China’s massive global economic reach made it hard for investors to avoid it.
He added, “People criticize me because I have investments in China and not Russia, but it is very different. Those who criticize write on a Chinese-made iPhone and wear Chinese-made clothes.”
In contrast, Norway’s $1.3 trillion sovereign wealth fund said it had disqualified China’s Li Ning because of an “unacceptable risk” that the sportswear maker was contributing to serious human rights abuses in Xinjiang.
In the case of Russia, foreigners own nearly $80 billion in debt, including sovereign bonds denominated in rubles, euros, and dollars, as well as corporate hard-currency securities. At the same time, investors outside Russia also own 86% of the Russian stock market.
In addition, Western companies such as British Petroleum, Societe Generale, Citigroup, and Apple have forged ties with Russia. Many have temporarily suspended or terminated their businesses since the invasion, which some say demonstrates the values of good corporate governance. It has now seeped from money management to corporate decision-making.
“There are no rules that will protect you,” Sonia Kowal, president of US-based Zevin Asset Management, said of investing in some countries, noting that she avoids investing in Russia and state-controlled Chinese companies.
Jeffrey Gutterman, a wealth manager, focused on governance in New Jersey, said he sold his company’s 5% stake in emerging markets last week after the Russian invasion, worried, among other things, that Chinese holdings could face restrictions as well.
“All we know is that the role of emerging markets in portfolios is now being reassessed,” he added.