2022 is not starting out as a good year for ESG / sustainability-oriented investments, business models and government policy initiatives. The primary cause of the problem is Russia’s invasion of Ukraine. The war has triggered poor returns on ESG-focused investment funds and the sustainability-oriented businesses that comprise them. The conflict has also cast doubts on UN’s ability to achieve their ambitious sustainable development agenda. Western government policies towards energy security and reducing carbon emissions are also undergoing significant changes as well.
Is it time to declare ESG / sustainability-oriented investment funds, business models and government policies nonviable, at least in the short term?
Let’s hope not, but there is plenty to be worried about.
First, consider the downturn in the global economy and losses suffered by investments made in funds guided by ESG principles. According to the International Monetary Fund the war in Ukraine has inflicted a major blow to the global economy that will hurt growth and raise prices. The IMF observed the entire global economy is feeling the effects of slower growth and faster inflation, which has contributed to the sharp declines in global capital markets since the start of 2022. This downdraft in market valuations has hit ESG-focused funds especially hard.
This turn of events comes on the heels of sustainable funds enjoying a record-breaking year in 2021. This fast growing asset class attracting nearly $70 billion in net flows, a 35% increase from 2020 according to the ai-cio.com website. Fast-forward to 2022, and there are many investment management pundits that are dismissing ESG-focused investments. Recent negative feedback appeared in both the Wall Street Journal and Barron’s. One might come to believe that ESG-focused investment strategies are a very bad idea. Is this trend potentially an indictment against ESG-focused business models as a whole?
UN Sustainability Goals and Government ESG Policies
The UN’s Sustainable Development Goals appear to be in serious jeopardy as well. UN Deputy Secretary-General Amina Mohammed recently observed “Our ability to achieve the Goals we set ourselves in the 2030 Agenda hangs in the balance. The war in Ukraine is causing human suffering on a massive scale. Over 4 million refugees from Ukraine have fled to neighboring countries and more than 6 million are internally displaced, with figures rising every day.”
The war in the Ukraine has had a broad impact on government energy policies as well, particularly in the EU/UK. The Wall Street Journal reported that before the invasion, the focus of ESG was mostly on business reduction of carbon emissions. Large increases in energy prices (oil and natural gas) have prompted big changes in the way Western governments are treating regulation of carbon emission and managing their switch to clean energy.
United Nations Secretary General António Guterres recently warned that intense focus on quickly replacing Russian oil could mean that major economies “neglect or kneecap policies to cut fossil fuel use.” While there has been progress on curbing greenhouse gas emissions, there has clearly not been enough to date – and the war in the Ukraine promise to throw wrench in future efforts along these lines.
The Environmental Crisis in Ukraine
To literally add insult to injury – the Ukraine is suffering an environmental crisis beyond the economic devastation and humanitarian nightmare created by the Russian invasion. Wired magazine recently reported that “Russia’s attack is literally tearing the country apart, polluting air and water. Ukrainians will suffer long after the conflict ends.”
The problems range from the flooding of abandoned coal mines seeping contaminated waste into ground water supplies to huge spikes in air pollution because of industrial toxins being released following Russian missel and artillery strikes.
The report goes on to say “The full toll will likely only become clearer in the aftermath of the war. And then the question is what will be done about it.” Seems clear that the adverse environmental impact of the war for Ukraine will continue long after the shooting stops.
Seeking a Silver Lining
Despite all the negative press about the economic, environmental, and humanitarian fallout from the war in Ukraine, there are some potentially promising ESG-related benefits that may result from the conflict.
The NY Times recently reported that “The invasion of Ukraine by Russia — the European Union’s largest supplier of natural gas and oil — has spurred governments to accelerate plans to reduce their dependence on climate-changing fossil fuels.”
In late March a new EU-US partnership was announced to reduce reliance on Russian energy. In the US – PBS (Public Broadcasting Service) reported that “Under the plan, the U.S. and other nations will increase liquified natural gas exports to Europe by 15 billion cubic meters this year, though U.S. officials were unable to say exactly which countries will provide the extra energy this year. Even larger shipments would be delivered in the future.”
PBS went on to report “At the same time, they will try to keep their climate goals on track by powering gas infrastructure with clean energy and reducing methane leaks that can worsen global warming. Although the initiative will likely require new facilities for importing liquified natural gas, the partnership is also geared toward reducing reliance on fossil fuels in the long run through energy efficiency and alternative sources of energy, according to the White House.”
Clearly a keen eye will need to be kept in the US on the ability of energy companies to vastly ramp-up natural gas production while mitigating the potential adverse impact to the environment. A National Public Radio report in the US echoed these concerns. In an All Things Considered report they noted “There’s concern that the U.S. push to send more natural gas to Europe will come at a cost to the climate. But experts say the Ukraine crisis may invigorate efforts around sustainable energy.”
Earlier this year the UK pledged to phase out Russian oil imports in response to the Russian invasion of Ukraine by year end. A new British Energy Security Strategy has also emerged in recent months in the face of rising energy prices and the war in Ukraine. What does this mean for climate change? The new strategy has been met with some skepticism by some, including the UK-based Carbon Brief website – as being ambitious but not clear about using offshore wind and nuclear energy as viable ways to reduce the country’s reliance on fossil fuels and meet long-term de-carbonization goals.
Finding a Sensible Way Forward
Fortune Magazine recently made a compelling argument about “How business leaders can turn ESG into a competitive edge – and a calling.” They make the argument that purpose and ESG are not distractions, they are keys to long-term performance. Fortune goes on to define “Authentic ESG – a commitment to environmental and social impact that is driven by a deep sense of purpose, embodied within the organization, woven into the business and integral to their brand story. They go beyond a compliance or contribution mindset and instead view ESG as a competitive advantage and ultimately a calling.” Brilliant.
If history repeats itself – wars always end, capital markets are cyclical, and will reward companies that pursue business models (like ESG) that deliver long-term profitable growth. Sustainability focused business models will more than likely prove their economic viability over the long run. Governments that place the well-being of their citizens first tend to enjoy greater popularity and longevity.
Finally, consider the warning that the UN recently issued: Climate change is harming the planet faster than we can adapt. Sustainable business practices and government policies clearly provide an answer to this dilemma.
ESG-focused investments, business models and government policies should never be subject to short-term thinking and investment returns. There is too much at stake, like the long-term sustainability and viability of the place we all call home – planet earth.
Share on and tag us @alwaysbecontent