Financing the invasion of Ukraine

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Warren Buffett is fond of saying that you only find out who is swimming naked when the tide goes out. The invasion of Ukraine has created low tide for all the funds that have been invested in Russian government bonds and major companies aligned to the Kremlin. They have been exposed.

Tuesday, March 8th 2022, 6:43AM 2 Comments

by Barry Coates

Mindful Money has been tracking these investments held by KiwiSaver and investment funds. At the end of September there were hundreds of KiwiSaver and investment funds with those holdings. Some divested before the invasion, but many have only divested over the past week. Only a few index funds still have investments, and most of those would sell if they could.

Divestment has had a major impact on the Kremlin and the companies that have helped finance the invasion. The value of the shares and bonds of major Russian companies has fallen by 80-99%, the value of the rouble has plummeted, and BP sold its 20% shareholding in Russian oil and gas producer, Rosneft. Divestment has helped de-legitimise Putin’s regime and contributed to economic and political pressure.

This highlights the power of divestment when undertaken at scale. For an individual invested in a listed company, selling their shares doesn’t make a difference. Someone else will buy them. But when the public acts collectively and demands action from their fund providers, there are real impacts. Around the world, people have demanded that their investment providers get out of Russian government bonds and the major Russian companies that are linked to the Kremlin. 

These impacts have also resulted in costs for investors. The exposure of New Zealand funds to these Russian assets has not been large so the losses will be manageable to the fund providers. It may be more difficult for those slow to divest to manage the embarrassment.

Transparency has also brought the lack of risk management into focus, especially for all those that claim to be doing Environment Social and Governance (ESG) management.

Since last September, there has been clear evidence of humanitarian and financial risk as Russia built its troop numbers around Ukraine’s border. Many fund managers chose to ignore that risk. Either their ESG analysis failed or fund managers have failed to integrate ESG risks into their portfolios. It is hard to take ESG analysis seriously if it is failing to manage such high profile conflict risks.

This failure reinforces widespread public concern over misleading claims of responsible investment. These have been echoed by the FMA in its inquiry in 2020, and in extensive international criticism, including by former BlackRock executive, Tariq Fancy. 

While these are important challenges for ESG approaches, there are also examples of good practice, as shown at last year’s Ethical Investment Awards. The leaders in responsible investment are avoiding harm, engaging with companies to raise their standards and investing in positive impact. At a time of mounting Russian aggression, leading fund providers used ESG tools to avoid investing in Russian assets, drawing on both an ethical and a risk management perspective. 

Restoring the credibility of responsible investing will require both calling out those making misleading claims while celebrating good practice. From Mindful Money’s perspective, greater transparency is the starting point for building public confidence. At the heart of investment performance is the objective reality of what securities are held in the fund portfolio. 

Mindful Money’s Fund Checker provides a listing of holdings on a look-through basis for all KiwiSaver and retail investment funds, categorised by issues of public concern. This is available as a free service. Mindful Money also undertakes portfolio analysis of wholesale funds and AUTs for financial advisers, asset owners and fund managers.

The rapid loss of value for Russian assets provides yet another example of how finance can no longer ignore the real world impacts of investment decisions. Responsible investment management is now integral to sound investment management, not an optional approach.

Barry is the founder and chief executive of Mindful Money. https://mindfulmoney.nz

Tags: KiwiSaver

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