As investors across the U.K. and Europe address their Russian holdings following the Feb. 24 invasion of Ukraine, the crisis also is causing a rethink of ESG-related risks and the lessons to be learned for other emerging markets such as China.
"The crisis is likely to serve as an additional wake-up call for investors to take ESG risks seriously," DWS Group said in a March 4 CIO alert. Russian assets have long traded at discounts because of environmental and governance concerns, the alert said, and the recent (market) collapse illustrates "how severe the impact of such risks can be when they are finally fully priced in."
As the Ukraine conflict highlighted dramatically, global investors using indexes cannot always control where they invest until a situation becomes untenable. For Russia, that moment came a week after the invasion when index providers MSCI Inc. and FTSE Russell cut Russian equities and bonds from widely tracked emerging markets indexes, after investors called the Russian market "uninvestible." Two weeks later, MSCI ESG Research downgraded Russia's ESG government rating to CCC, the lowest rating possible, due to risks from the impact of international sanctions and Russia's "financial isolation."