Russia’s invasion of Ukraine is a horror story. And it’s testing ESG commitments and investment horizons like never before.

While the onset of COVID-19 threw the spotlight on companies ‘doing the right thing’ to help society tackle the virus, and raised questions about timeframes for environmental action given the disruption of the pandemic, the conflict on the borders of eastern Europe brings different but acute issues across the social and governance spectrums.

With so many aspects of the situation on a knife-edge, how this changes priorities for ESG investors and corporate leaders may be well down the list of the world’s priorities. But the way that markets respond to government action, and that ESG factors become reframed by the conflict as it evolves, will have long-term ramifications for many business sectors and institutional investors.

Of course, no sector is more under the microscope than the defence industry. A European Union move to reshape the ESG rulebook has been accelerated amidst questions over whether weapons manufacturing is an asset that should attract more favourable access to finance, as Bloomberg reported.

The same day, a Forbes article trumpeted how the actions of political leaders reflect ESG frameworks and a “21st century values-based economy.” Though the point that “European countries most at economic risk due to their dependence on Russian oil and gas markets, are expediting their transition to clean energy as a result of Putin’s aggression and violence” does seem a gross oversimplification.

The Russian and Belarussian economies have already been hit hard, of course. ESG raters, as Reuters covered, are already downgrading fast.

And in a perhaps-obvious Daily Telegraph article, Downing Street is apparently on a “charm offensive” on behalf of the defence sector as ESG inventors grow cold, spawning the headline ‘Fears rise that ethical investing is undermining national security’.

For me, this piece in the Evening Standard set out the current ESG picture for the defence industry clearly and simply. Russia’s invasion of Ukraine asks tough questions of ESG it said - and “Defence is like insurance: you hope to never have to use it, but you’ll be glad it’s there if you do”.

It makes the point that ESG frameworks are being tested at the moment not just for their rigour, clarity and applicability, but for their adaptability: in this case, to a human tragedy being played out with no certainty about how and when it will be resolved.

As companies across many sectors have rushed to review or revise their Russian business interests over the past week - and the communications sector has run its own rule over self-imposed sanctions, transparency over clients and its moral fibre (with more to come from murkier corners in time, surely) - investor considerations and long-term impact on stakeholder value has been more in the background.

As what’s happening militarily in the Ukraine continues to develop, civilians take up arms and western economies continue to respond to it, we will continue to see new tests for ESG and its prominence in determining long-term global horizons.

The ESG News Review is written by Steve Earl, a Partner at BOLDT. 

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