How ESG investors are responding to Russia’s invasion of Ukraine

Greetings from New York where I, like many, have been unable to take my eyes off my Twitter account as horrifying and heartbreaking events unfold following Russia’s invasion of Ukraine. The events present a mounting challenge to the ESG world.

One sign of this came with the dramatic news on Sunday that BP, the British energy group, will divest its stake in Rosneft, the Russian energy company. Another emerged when the $1.3tn Norwegian sovereign wealth fund announced plans to divest its Russian assets too. These moves are likely to encourage further divestments — as we point out below, in a note outlining the list of European companies that are entangled with Russia’s sovereign wealth fund. (Check it out for some surprising names.)

Separately, this week we are likely to see a number of western companies announcing aid for Ukrainian refugees and citizens; Elon Musk’s decision to reposition his Starlink satellites to provide internet access for Ukraine is notable in this respect. And there will be intensifying discussions about the green energy implications of the war. Last week, for example, Bill McKibben, the veteran environmental campaigner, told western leaders that “if you want to stand with the brave people of Ukraine, you need to find a way to stand against oil and gas”, to reduce energy dependence on Russia.

“After Hitler invaded the Sudetenland, America turned its industrial prowess to building tanks, bombers and destroyers. Now, we must respond with renewables.”

But it is far from clear whether western governments will listen. Either way, see below for last week’s extraordinary Atlantic wind power auctions and new research on the energy holdings of ESG funds. Also note another fast-developing biodiversity issue that is being overshadowed by the Ukrainian news: the split between consumer groups such as Coca-Cola and Nestlé, and chemical giants such as ExxonMobil, Dow, and Shell in the plastics war. Gillian Tett

Will ESG investors force widespread divestments from Russia?

What does the following list of companies have in common? Switzerland’s LafargeHolcim, Japan’s AEON Infrastructure Corporation, France’s Schneider Electric and Dalkia SA (part of EDF Group), Spain’s waste management company Urbaser, Germany’s wholesale-retailer Metro Cash & Carry, and Siemens Mobility, and Britain’s Aggreko group.

The answer, as one eagle-eyed Moral Money reader has pointed out to us, is that these entities all embarked on joint ventures with Russia’s sovereign wealth fund, the Russian Direct Investment Fund, in 2019, according to the RDIF website. So did financial companies such as France’s sovereign wealth fund, Italian development institute Cassa Depositi e Prestiti (CDP), the American Chamber of Commerce in Russia, and the United Green Group (the British investment holding entity) to name but a few.

So how will ESG investors treat the groups on this list, following the Russian invasion of Ukraine? How will the companies respond? The only honest answer is that we do not know, since events are moving so fast that most corporate boards and investment committees are in a state of shock.

What is clear is that this list of companies is just the tip of the iceberg and there will be further scrutiny. Pressure on ESG investors to act is rising, particularly given that Norway’s $1.3tn sovereign wealth fund has decided to cut all its Russian exposures.

Meanwhile, corporate boards are taking pre-emptive measures. The most startling of these is the eye-popping $25bn writedown that BP announced yesterday as a result of its divestment of its Rosneft stake. However, this will not be the last. Moral Money will be watching to see how ESG investors respond, and we are keen to hear from readers about where to look. (Gillian Tett)

The plastics war: Coca-Cola vs Exxon

A few years ago my family participated in an initiative to help build housing in a refugee camp in Colombia. After building, my teen daughters decided to tidy up the plastic waste on the dirt tracks around us. Big mistake. As soon as we started yanking the old plastic rubbish out of the ground, more plastic came to the surface. To our shock we realised that the entire camp was living on a large waste fill that was only concealed by a thin layer of dirt, and plastic was quite literally embedded into the hill.

That plastic serves as a potent symbol for ESG investors as a UN gathering to cut plastic waste gets under way today in Kenya. Nobody doubts the need for action on biodiversity terms. As Sarah Morath, an associate professor at Wake Forest University, notes in this punchy piece, scientists calculate that by 2025, “some 100mn to 250mn metric tons of plastic waste could enter the ocean each year. Indeed, by 2050 there could be more plastic in the ocean than fish, when measured by weight”. Yikes.

This has prompted countries such as Peru and Rwanda to propose measures to cut pollution from the entire plastics supply chain, from chemical production to disposal. This has been backed “by at least 58 countries”, my colleague Camilla Hodgson notes. And some big consumers of plastic, such as Coca-Cola, PepsiCo, Unilever and Nestlé, are backing this initiative. They argue that if a treaty emerges that “covers the whole lifecycle of plastics, not just the management of waste, and targets a reduction in the production and use of virgin plastics” this will spark more research and development into plastics alternatives.

Plastics makers are, unsurprisingly, opposed to the idea of production cuts. The 190-strong American Chemistry Council group, which includes ExxonMobil, Shell, and Dow, is trying to water down the initiative. They want any deal to focus on reuse of plastics, to promote a circular economy, and measures to tackle waste. Japan and some other developed countries have also pushed for a more modest initiative “that focuses solely on plastic waste in oceans, with an emphasis on what happens to the used material”. The US government seems to back this.

Does this make the talks pointless? Not necessarily. Morath points out that the UN and other bodies have brokered international treaties before to tackle issues such as acid rain and mercury contamination, and “plastic [is] a good candidate. . . [since] like ozone, sulfur and mercury, plastic comes from specific, identifiable human activities that occur across the globe”. Moreover, the US is keen to get a deal, making progress in Kenya more likely.

But it will be interesting to see which version of these proposals prevails — and whether the issue becomes a new front for ESG activists and/or sparks activist action against chemicals companies. Until now, campaigns by non-governmental groups have had only limited success. But ESG activists are jumping into all manner of new battles right now, with some unlikely alliances emerging (just look at Carl Icahn’s astonishing battles with McDonald’s in relation to pigs).

Either way, it is clear there will be huge business opportunities for any green entrepreneur who can develop a functioning alternative to plastic. Watch this space. (Gillian Tett)

Energy companies creep into ESG funds

Propelled by the global energy uncertainty, which arrived on top of rising inflation, the S&P 500 energy sector is up 23 per cent for the year and is the only sector in positive territory.

As stock prices rise they become ever larger holdings in index funds. Now, energy stocks are increasingly becoming larger holdings in ESG ETFs.

BlackRock’s iShares “aware” ESG ETF is the world’s largest with $24bn of assets under management. As of February 24, ExxonMobil was the fund’s 24th largest holding, up from 39th place at the end of 2021.

In the second-largest ESG ETF in the US, TotalEnergies, the French oil major, is now a top 10 holding, up from 14th place at the end of 2021.

The reordering is to be expected. These ETFs track an underlying index, in both cases from MSCI, and passively follow the ebb and flow of the market. But the growth of energy stocks in ESG funds is a reminder to investors that they need to look under the hood to understand what they might be buying. (Patrick Temple-West)

Smart Reads

• If you want to get another glimpse of the shifting zeitgeist around green initiatives, take note of this: last week the US conducted its biggest offshore auction of wind leases ever seen, off the New York and New Jersey coasts, and the “sale attracted record bids of more than $4bn, outstripping any oil and gas auction in American waters”, as this FT piece notes. Meanwhile the biggest bid — $1.1bn from Bight Wind Holdings, a venture between utilities RWE of Germany and National Grid of the UK — was “more than eight times the previous record for a single area”.

• Brookfield’s attempted acquisition of Australian energy giant AGL is “great opportunity” for the Canadian private equity company, said Australian mining billionaire Andrew Forrest. Speaking at the Queensland Media Club on Friday, Forrest said he too has analysed AGL as a potential acquisition target. You can read Forrest’s full remarks here.