The corporate world has galvanized against Russia. Getting it to combat other evils may be trickier

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‘Investors are still inherently motivated by profit maximization … so it is really a matter of rebalancing global investments without addressing social and environmental issues’

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Russia’s invasion of Ukraine has sparked a nearly universal move by western businesses and investors to dispose of assets and cease operations in any way connected to the aggressor nation. It’s a collective response that is spurring hopes that corporations and institutional investors will be equally galvanized to push for action on other environmental, social and governance (ESG) concerns.

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“When I think of the impact of recent events, sanctions in Russia and the like, I see this as potentially broadening the ESG conversation,” said Ben Hawkins, head of infrastructure, renewables and sustainable investing at Alberta Investment Management Corporation (AIMCo).

“Frankly, I think even in other jurisdictions where sanctions are less likely, some of these recent events will have people a little bit more cautious… I mean, fundamentally, if you’re not paying attention to these issues, it’s just a matter of time before they do impact the bottom line.”

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The flight from Russia is taking place for both moral and financial reasons — or values and value, as AIMCo chief executive Evan Siddall said in a statement this week announcing the Alberta Crown corporation with $160-billion in assets under management would be divesting all holdings in Russia due to the invasion and ensuing humanitarian crisis.

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The moves have been swift and the list is growing. After pledging to maintain operations at its factories in Russia, Canadian auto parts maker Magna International Inc. made an about-face Friday, idling the operations that employ 2,500 Russians. Bombardier, too, announced that is has “suspended all activities with Russian clients, including all forms of technical assistance.”

Other companies, such as Kinross Gold, had already suspended their activities and operations at its mining sites there, while large institutional investors across Canada, including AIMCo and the Caisse de dépôt et placements du Québec are unloading investments in Russia as fast as they can.

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The growing isolation of Russia follows some high-profile exits from partnerships there by energy giants Shell and BP, and a call this week from former Ukraine finance minister Natalie Jaresko in the pages of the Financial Times for companies to stand behind their proclamations on ESG on behalf of themselves and their shareholders.

“Large or small, all these companies are trading off the immediate taint of association with the Putin regime which they know for sure is ‘dirty’ — as in stigma-bearing — at costs that are impossible to predict,” said Oana Branzei, a professor of international business and strategy and sustainability at the Ivey Business School at Western University.

“Distancing themselves undoes these prior investments and curtails any future gains from those associations. However, not distancing themselves will spoil — you can even use the word soil — their reputations.”

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The scale of the response to Russia’s unprovoked invasion is unprecedented, involving corporations, investors and governments — and it would be difficult to replicate even as it shines a light on previously underexposed elements of ESG such as how a country is governed and how it treats its citizens, said Branzei.

“We have seen snippets of this (speed) before, like with an earthquake or … natural disaster, but we haven’t seen anything of the kind of violation of shared morals (and) agreement between shareholders,” she said.

If you’re not paying attention to these issues, it’s just a matter of time before they do impact the bottom line

Sanctions mobilized against Apartheid in South Africa took many years to build up, and even countries with well-documented human rights abuses such as China have not faced such a reaction from companies and investors in Europe and North America, she added.

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Protecting Ukraine’s independence and democracy has been relatively easy for corporations and institutional investors to rally around, said Charles H. Cho, professor of sustainability accounting at York University’s Schulich School of Business, but it may prove much harder to galvanize the business community around other ESG issues such as weaning the world off its dependence on fossil fuels — a goal that not everyone shares.

Moreover, he added, the movement of funds out of Russia as governments try to use sanctions and tariffs to squeeze the life out of the military assault may simply shift investments to places that are friendlier, at least for now.

“While divestments from Russia are certainly happening … they are likely to be reallocated into investments in other countries,” he said, adding that some are more symbolic or political than practical due to market constraints.

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“Investors are still inherently motivated by profit maximization to embellish their portfolios — hence greed … so it is really a matter of rebalancing global investments without addressing social and environmental issues.”

Cho said the apparent risk reduction from disposing of assets in Russia may therefore prove to be “illusionary,” and he warned that there could be unintended consequences.

“There certainly can be, especially in terms of geopolitics,” he said. “Similar authoritative regimes tend to show solidarity when ‘cornered’ (or) isolated so … there is the possibility of (Russian) ‘rapprochement’ with China.”

China appears to be taking steps to maintain distance from Russia for the moment. In one of the most recent examples of this, the Asian Infrastructure Investment Bank, which is backed by China, said in a Thursday that “all activities relating to Russia and Belarus are on hold and under review.”

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But if connections between the two countries grow, that could be a further challenge for investors faced with the fresh emphasis on the bottom-line impact of governance and social issues, particularly given the huge relative size of the Chinese economy.

“I think what is clear now is that we have to consider these ESG factors and also political factors and others in our decision making,” said Olaf Weber, a professor at the school of environment, enterprise and development at the University of Waterloo.

“And maybe it shows as well that if you had considered these issues before (as a company or investor in Russia), then you might not have had these losses.”

What is clear now is that we have to consider these ESG factors and also political factors and others in our decision making

Branzei said what is happening in Russia is unlikely to spread to China — despite well-documented human rights abuses.

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“China will not repeat history because they’re watching and learning, and they’re understanding what not to do to trigger such a wave of instantly severing ties,” she said.

In addition, China has resources crucial to the technology sector that are harder to replace than Russian oil and gas.

“The rare metals … you don’t have (in) relatively more humane or safer regions,” she said. “So it’s not even the dependence as much as there are no substitutes for it.”

European nations dependent on Russian oil and gas are, on the other hand, actively seeking alternatives. Talks have included turning to more nuclear energy and even a delaying in the transition from coal.

In Canada, some in the energy industry are pushing amid the crisis for policies and investments that would help oil and gas companies here build up infrastructure to take advantage of demand for alternative supply.

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Greg Taylor, chief investment officer at Purpose Investments — which signed a pledge with AIMCo and other investment funds this week to divest of holdings of Russian companies “for as long as the Russia invasion persists” — said it was a wakeup call for many Canadians who learned the country had been importing a modest amount of oil from Russia only when the federal government announced it was being cut off.

“And Eastern Canada is importing from Venezuela and Saudi Arabia,” he said. “Is it better to have it from Alberta? (That) is a conversation that I hope will come out of this.”

Taylor said such discussions would help keep the focus of Canadian companies on all three elements of ESG: environmental, social, and governance.

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“From an ESG lens, there’s definitely cleaner oil coming out of Canada than there is in other parts of the world, and (those producers) will definitely have more societal positives than than foreign oil,” he said.

But finding consensus on that issue and the many others around ESG may not prove as easy as rallying the world against Russia.

“It’s rare that you find a situation where you aren’t concerned (with) both pros and cons with respect to  particular investment or broader jurisdiction,” said AIMCo’s Hawkins. “Issues that are of concern … can be addressed over the long run, but it really is, I think, a much more subjective exercise.”

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